Tag Archives: NovoJuris Legal

Issuance of Equity and Preference Shares with Differential Rights and Variation of Rights


The term differential rights with respect to shares can be interpreted to mean the existence of rights different in nature than the rights that are inherently associated with ordinary shares. The holder of these shares has rights which are different from the holder of ordinary shares. Differential Rights in association with shares are in relation to voting rights, dividend or otherwise.

Issuance of shares with differential rights may be used as a tool for strategizing control and dilution of voting rights in a company.

Shares with Differential Rights under the Companies Act, 2013

Section 43(a) of the Companies Act, 2013 provides for the issue of equity shares having differential rights in accordance with Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014. Rule 4(1) of the Companies (Share Capital and Debentures) Rules, 2014 stipulates that a company limited by shares can issue equity shares with differential rights as to dividend, voting or otherwise, only if such issue of shares meet the following conditions:

  • The issue should be authorised by the articles of association;
  • The issue should be authorised by the shareholders of the Company by way of an ordinary resolution; (issue of such shares of a listed company shall be approved by shareholders through postal ballot)
  • The shares with differential rights shall not exceed twenty-six percent of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time;
  • The company should have a consistent track record of distributable profits for the last three years;
  • The company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
  • the company has no subsisting default in the payment:
  1. a declared dividend to its shareholders or
  2. repayment of its matured deposits or
  3. redemption of its preference shares or debentures that have become due for redemption or
  4. Payment of interest on deposits or debentures
  • The Company should not have defaulted on:
  1. Repayment of loans from banks and public financial institutions or interest thereon
  2. Payment of dividend on preference shares
  3. Payment of statutory dues for employees
  4. Depositing moneys into the Investor Education and Protection Fund.

However, a company may issue equity shares with differential rights upon expiry of five years from the end of the financial year in which such default was made good.

  • The Company should not have been penalized by any Court or Tribunal during the last 3 years of any offence under RBI, SEBI, SCRA, FEMA or any other special Act, under which such companies being regulated by sectoral regulators.

Additionally, the notice of the general meeting for issuing equity shares with differential rights shall contain particulars in the explanatory statement as provided in Rule 4(2) of the Companies (Share Capital and Debentures) Rules, 2014.

Private companies have been exempted from the applicability under Section 43 vide a Ministry of Corporate Affairs Notification G.S.R 464 (E) dated June 5, 2015. As Section 43 is read in accordance with Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014, the said rule shall also not be applicable to private companies.

However, the question still remains whether private companies are at a full liberty to structure their share capital as they are not required to comply with Section 43 of the Companies Act, 2013.

Differential Voting Rights

Voting Rights of Holders of Compulsorily Convertible Preference Shares

As per Section 47(2) of the Companies Act, 2013, a holder of compulsorily convertible preference shares shall vote only on those resolutions:

  • That directly affects the rights attached to his preference shares
  • For winding up of the Company.
  • For repayment or reduction of its equity or preference share capital.

However, a holder of compulsorily convertible preference shares is eligible to vote on all resolutions placed before the Company in case the Company fails in paying the dividend in respect if those preference shares, for a period of two years or more. Private companies are exempted from complying with Section 47, where memorandum or articles of association of the private company so provides.

If a Company has issued multiple classes of preference shares, the variation of rights (voting and dividend) of such classes of preference shareholders would be as prescribed by Section 48 which applies to both public and private companies. For the variation of rights for different classes of preference shareholders, a special resolution is required to be passed by the said class of shareholders for which the rights are to be varied.

Therefore, a Company may have different classes of preference shareholders having voting rights different from the voting rights available to ordinary class of preference shareholders.

Voting Rights of Holders of Equity Shares

Under Section 47(1) of the Companies Act, 2013, in regard to voting rights, it has been stated that:

  1. Every member of a company limited by shares and holding equity share capital therein, shall have a right to vote on every resolution placed before the company; and
  2. His voting right on a poll shall be in proportion to his share in the paid-up equity share capital of the company.

As mentioned earlier, Section 43 provides for issuing equity shares with differential rights which includes but is not limited to differential rights as to voting.

In case a Company has multiple classes of equity shareholders, the variation of rights (voting and dividend) of such classes of shareholders would be as prescribed by Section 48 which applies to both public and private companies.

In a recent change, the Government of India has come up with a draft ecommerce policy wherein it suggests that there should be differential voting rights in order to give Indian founders with minority stakes more control over the Company.


Shares with differential rights may have rights that are secondary to those attached to ordinary equity shares. Thus, these enable promoters to have control of the company. An investor investing funds into a company may also want beneficial voting rights (along with preference shareholding), in order to ensure that the company utilises the supplied funds judiciously and honour all obligations undertaken in the transaction documents. This can be achieved by way of shares issued to them having differential rights. Hence, the transaction documents of such issuance and subscription of the shares with differential rights must include the available rights (e.g. reserved matters) to the investor and detail the manner of exercise of such rights.

Authors: Mr Spandan Saxena Ms Alivia Das.


Regulatory Update: Companies Act, 2013 for KYC of Directors

The Ministry of Corporate Affairs (the MCA) vide its notification dated 5 July 2018, has notified the Companies (Appointment and Qualification of Directors) fourth Amendment Rules, 2018 which shall come into force with effect from 10 July 2018.

The MCA shall be updating its registry and conducting KYC of all Directors through a new e-form DIR-3 KYC. As immediate step, the e-form DIR-3 KYC shall have to be compulsorily filed on or before 31 August 2018 by:

  • Every Director (whether Indian or Foreign) who has been allotted Director Identification Number (DIN) on or before 31 March 2018 and whose DIN is in ‘Approved’
  • Every person having DIN irrespective of whether he holds any Directorship.
  • All disqualified Directors.

Going further, every individual who has been allotted DIN as on 31st March of a respective financial year shall have to file the e-form on or before 30th April of the following financial year.

Filing Fees for e-form DIR-3-KYC (as per the Companies (Registration Office and Fees) Third Amendment Rules 2018) which shall come into effect from 10th July, 2018):

Due dates Filing Fees
i)         Fees payable till 31st August, 2018 for DIR-3-KYC for current financial year (2018-19) Nil
ii)       Fees payable on or after 1st September, 2018 for current financial year (2018-19) Rs. 5000
iii)      Fees payable till 30th April of every financial year (i.e. from FY 2019-2020 onwards) for DIR-3-KYC as at 31st March of immediate preceding financial year Nil
iv)     Fees Payable in delayed cases Rs. 5000

The MCA will mark all approved DINs as ‘Deactivated’ if the e-form is not filed within the aforementioned due dates citing reason as ‘Non-filing of DIR-3 KYC’. The deactivated DIN shall only be activated after the e-form DIR-3-KYC has been filed with MCA with the additional fees.

Few important points to remember while filing the e-form:

  • Income Tax PAN, in case of Indian nationals and Passport, in case of Foreign Nationals is mandatory.
  • A Unique Personal Mobile Number and a Personal Email ID shall have to be mandatorily provided in the e-form and the same would be verified by a One Time Password (OTP).
  • The e-form should be filed by every Director using his own DSC. Thus, it is mandatory for every Director to have a valid DSC.
  • The e-form should be duly certified by a Practising Chartered Accountant or a Practising Company Secretary or a Practising Cost Accountant.

Immediate Action Plan:

  • Apply for DSC of all Directors (renewing expired DSCs as well as applying for fresh ones)
  • As attachments:
    1. Proof of Identity: PAN/Passport/Aadhar
    2. Proof of Address: Passport/Aadhar Card/Voter Identity Card/Driving License

Regulatory Update – SEBI : Proposes three-phase process for re-classification of promoters as public shareholder

SEBI on July 24, published its consultation paper on ‘Consultative Paper on Revision of Provisions pertaining to Reclassification of Shareholders’, wherein SEBI has proposed a three phase process for reclassification of promoters as public shareholders. The issue of re-classification had assumed significance at the time of implementation of minimum public shareholding (MPS) norms. In order to comply with the 25 per cent MPS rule, some entities were seen re-classifying themselves as ordinary shareholders just to comply with the regulations. As per the consultation paper issued by SEBI, the following process to be followed for re-classification of promoters as public shareholders:

  • Stage I-Application by the promoter to the listed entity for re-classification as a public shareholder: Currently, the  application  for  re-classification  may  be  filed  either  by  the  listed entity or concerned shareholder to the stock exchange. It has been observed that permitting the listed entity to re-classify a promoter as a public shareholder without any application for such re-classification from the concerned promoter is prone to misuse. Further, there is no specific requirement for the promoter to apply for re-classification through the listed entity. Therefore, it is proposed that re-classification is to be permitted only upon the request of the promoter to the listed entity.
  • Stage II-Placing the request of the promoter before the Board of Directors of the listed entity: Currently there is no clear role of the board of directors of the listed entity under the current provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 in the matter of re-classification of a promoter into a public shareholder. It is proposed that on receipt of request for reclassification from the promoter, the listed entity shall be required to place it before its board of directors and the recommendations of the board (positive/negative) may be required to be placed before the shareholders.
  • Stage III: Approval by the shareholders: Shareholder approval is currently required only in certain specified cases. The profile of promoters/ promoter group is generally an important criteria  for investors to make their  investment  Therefore, it is  critical  that investors have a say in all reclassification requests of promoters. Hence, it is proposed that in all cases of re-classification of promoters, including the recommendation  of  the  board, shall  be  required  to  be  placed  by  the  listed entity  before  the  shareholders  in  a  general meeting  and  approved  through  an ordinary resolution. In order to avoid conflict of interest, it is proposed that the specific promoter who has requested  such  reclassification,  its  promoter  group  and persons acting in concert shall not be permitted to vote on such resolution. Further, the listed entity shall ensure a time gap (a cooling off period) of at least 6 months between the date of board meeting and the shareholder’s meeting considering the request of the promoter.

SEBI has also issued the conditions which are applicable  for  promoters  to  be  eligible  for  re-classification  as  public shareholders to ensure outgoing promoters do no exercise control over the listed entity. Each step in the process of reclassification will be considered a material event for disclosure to shareholders by the company. Also, re-classification to be  permitted  only  by  compliant  listed  entities.

Source: https://www.sebi.gov.in/reports/reports/jul-2018/consultative-paper-on-revision-of-provisions-pertaining-to-re-classification-of-shareholders_39666.html


Regulatory Update – Law Commission Recommendation : Legalisation of Regulated Betting and Gambling Activities,

The Law Commission of India, in its 276th report, has recommended legalisation of regulated betting and gambling activities, asserting that a complete ban has not been returning the desired results. The report states that it is not possible to prevent these activities completely and therefore, the best and most viable option is to effectively regulate them. The Commission suggested in its report that regulated gambling would ensure detection of fraud and money laundering as well. The commission further went on to state that any regulation of gambling would require a three-pronged strategy, reforming the existing gambling (lottery, horse racing) market, regulating illegal gambling and introducing stringent and over- arching regulations.

The study was conducted and the report was formulated in furtherance of the directive issued by the Supreme Court in the case of Board of Control for Cricket in India v. Cricket Association of Bihar & Ors. wherein the commission was directed to study the possibility of legalising betting in India and its positive and negative implications.

Some of the recommendations of the commission as stated in the report are:

  • Legislative Competence of the parliament: Since online betting and gambling are offered and played over media (telephones, wireless, broadcasting and other like forms of communication) which is covered under Entry 31 of List I of the Seventh Schedule to the Constitution, the Parliament has the legislative competence to enact law(s) dealing with the same.
  • The Parliament may also enact a model law for regulating gambling that may be adopted by the States or in the alternative, the Parliament may legislate in exercise of its powers under Articles 249 or 252 of the Constitution include other recommendations from report.
  • Restriction of number of transaction: Gambling and betting, if any, should be offered only by Indian licensed operators from India possessing valid licences granted by the game licensing authority. For participants, there must be a cap on the number of transactions an individual can indulge in these activities in a specific period, i.e., monthly, half-yearly or yearly. The nature of stakes should be restricted to money with a linkage to PAN card and Aadhaar card, and the betting amount should be prescribed by law, having an upper limit on the amount one can legally stake in a gamble, which may be on the basis of the deposit, winnings or losses.
  • The commission has also recommended making the transaction cashless to regulate illegal activities such as money laundering. Similar restrictions should also be prescribed for the purpose of the amount one would be allowed to stake while using electronic money facilities of the likes of credit cards, debit cards, net-banking, etc.
  • Gambling must be classified into two categories, namely ‘proper gambling’ and ‘small gambling’. ‘Proper gambling’ would be characterised by higher stakes. Accordingly, only individuals belonging to the higher income group shall be permitted to indulge in this form of gambling. On the other hand, individuals belonging to the lower income groups will have to confine themselves to ‘small gambling’, not being permitted to stake high amounts (falling within the bracket of ‘proper gambling’).
  • In order to protect the public from the ill-effects of these activities and with a view to have enhanced transparency and state supervision, all betting and gambling transactions should be linked to the operator’s as well as the participant’s/player’s Aadhaar Card/PAN Card.
  • Permissible Personnel: The enactment(s) so made to regulate gambling and betting activities must ensure that vulnerable sections of the society are protected from being exploited by the possible ill-effects of these activities. In particular, the youth and children below the age of 18 years (who may or may not be posing as adults), and those who are below poverty line and to whom as a social welfare measure, Central / State Governments provide subsidies to their Jan Dhan Account for sustenance. Putting such restriction is a must so that the money provided by the Government for their sustenance on different heads under the Direct Benefit Transfer Scheme is not misused in participating in gambling and betting and these vulnerable people are protected from the vice of gambling and betting. In other words, all those who get subsidies or do not fall within the purview of the Income Tax Act or the GST Act should be debarred from participating in online and / or offline gambling platforms.
  • There must be a stringent law(s) in place to regulate Foreign Direct Investment on one hand and to prevent money laundering on the other.
  • The “National Sports Development Code of India, 2011”, which aims at preventing betting and gambling in sports or any other code applicable from time to time, will also require an amendment/modification, to create an exception for the same, if betting and gambling are to be regulated.
  • Match-fixing and sports fraud should be specifically made criminal offences with severe punishments.

Source: http://lawcommissionofindia.nic.in/reports/Report276.pdf

Regulatory Update: Negotiable Instruments (Amendment) Bill, 2017

The Negotiable Instrument Act, 1881 defines cheques, promissory notes and bills of exchange as valid negotiable instruments and provides for penalties for bouncing of cheques and not honouring these negotiable instruments. The Parliament has recently passed the Negotiable Instruments (Amendment) Bill, 2017 (“Bill”) with an aim to prevent delay/non-payment of cheques issued and to prevent the delay in cheque bounce cases.

  • Insertion of Section 143A: Interim Compensation: The Bill seeks to add a new section 143A to the Negotiable Instruments Act, 1881 (“Act”) under which the Court trying an offence under section 138 may order the drawer of the cheque to pay interim compensation to the complainant, (a) in a summary trial or a summons case, where he pleads not guilty to the accusation made in the complaint; and (b) in any other case, upon framing of charge. This interim compensation will not exceed 20% of the amount of the cheque and has to be paid within 60 days from the date of order. This interim compensation may be recovered in the manner provided under section 421 of CrPC – by way of attachment and sale of any movable property of the drawer, or a warrant to the Collector of the concerned district. If the drawer of the cheque is acquitted, the court shall direct the complainant to repay to the drawer the amount of interim compensation, with interest at the bank rate as published by the Reserve Bank of India, prevalent at the beginning of the relevant financial year, within sixty days from the date of the order.
  • Insertion of Section 148: Deposit: As per this section, in case of an appeal by the drawer against conviction under Section 138 of the Act, the appellate court may order the appellant to deposit a minimum of 20% of the fine or compensation awarded by the trial court within 60 days from the date of order of the appellate court. The amount payable under this section shall be in addition to any interim compensation paid by the appellant under section 143A. The appellate court may direct the release of the amount deposited by the appellant to the complainant at any time during the pendency of the appeal. If the appellant is acquitted, the court shall direct the complainant to repay to the appellant the amount so released, with interest at the bank rate as published by the Reserve Bank of India, prevalent at the beginning of the relevant financial year, within 60 days from the date of the order.
  • The amendment will come into force with effect from the date of notification of the same by the Central Government in the official gazette.

Regulatory Update: Parliament passes Specific Relief (Amendment) Bill, 2017

Specific Relief Act, 1963 sets out the remedies available to the parties for violation of their civil or contractual rights. The parliament has recently passed the Specific Relief (Amendment) Bill, 2017 (“Bill”). Some of the importance amendments as per the Bill are:

  • Specific Performance: One of the main amendments brought by the Bill is amendment to Section 10 of the Specific Relief Act, 1963 wherein the discretionary power of the court to grant specific performance has been. Earlier the Courts had the discretion to grant specific performance if either the monetary compensation was inadequate or unascertainable. The Bill now makes the grant of specific performance of contracts by the courts compulsory. Thus the plaintiff can seek specific performance without having to prove specific circumstances.
  • Substituted Performance: The Bill has introduced substituted performance wherein if the contract is violated due to non-performance by any party, the party who suffers by such breach shall have the option to get the performance substituted through a third party or by his own agency, and, recover the expenses and other costs actually incurred, spent or suffered by him, from the party committing such breach. The affected party has to give a written notice of atleast 30 days before obtaining such substituted performance.
  • Infrastructure Projects: The amendment introduces a special category of infrastructure projects. No injunction shall be granted by a court in a suit under the Act involving a contract relating to an infrastructure project, where granting injunction would cause impediment or delay in the progress or completion of such infrastructure project. Infrastructure projects mean those projects which are mentioned in the Schedule of the Bill such as transport, energy, water and sanitation, communication, and social and commercial infrastructure such as affordable housing etc.
  • Special Courts: The State Government, in consultation with the Chief Justice of the High Court, shall designate, one or more civil courts as special courts, within the local limits of the area to exercise jurisdiction and to try a suit in relation to infrastructure projects.
  • Time limit for disposal of cases: The Bill seeks to fix a time limit of 12 months from the date of service of summons to the defendant for disposal of cases. It may be extended for 6 months, if reasonable.
  • The amendment will come into force with effect from the date of notification of the same by the Central Government in the official gazette.


Change in Levy of Additional Fee for Delay in Annual Filings with Ministry of Corporate Affairs


The Ministry of Corporate Affairs (the MCA) on 8 May 2018, notified the Companies (Registration Offices and Fees) Second Amendment Rules 2018. With this notification, all annual filings filed post 30 June 2018, would incur a penalty of Rs. 100 per day for the period of delay. The MCA has notified these amendment rules in pursuance of an amendment made in section 403 of the Companies Act 2013 (the “Act”), vide the Companies (Amendment) Act, 2017.

With this amendment, the delay in filing of Annual return under section 92 of the Act or Annual Financial Statements & Boards’ Report under section 137 of the Act would result in late filing fee of Rs. 100 per day with effect from 1 July 2018.

The levy of penalty/additional fee after the expiry of 30 June 2018 shall be as provided in the below table:



Additional Filing fees

If the due date is after 30 June 2018

If the due date is prior to 30 June 2018

Form 23 AC, 23 ACA, 23AC- XBRL, 23 ACA- XBRL, 20 B, 21B under the Companies Act, 1956 Not applicable (As the due date would have expired under the Companies Act 1956)
Sl. No. Period of delay Additional fee payable (in Rs.) up to 30 June 2018
1 Up to 30 days 2 times of normal filing fees
2 More than 30 days and up to 60 days 4 times of normal filing fees
3 More than 60 days and up to 90 days 6 times of normal filing fees
4 More than 90 days and up to 180 days 10 times of normal filing fees
5 Beyond 180 days 12 times of normal filing fees




Rs. 100 per day with effect from 1 July 2018

Form MGT-7 under section 92 of the Act


Form AOC-4, AOC-4 CFS, AOC-4 XBRL under Section 137 of the Act

Rs. 100 per day
Sl. No. Period of delay Additional fee payable (in Rs.) up to 30 June 2018
1 Up to 30 days 2 times of normal filing fees
2 More than 30 days and up to 60 days 4 times of normal filing fees
3 More than 60 days and up to 90 days 6 times of normal filing fees
4 More than 90 days and up to 180 days 10 times of normal filing fees
5 Beyond 180 days 12 times of normal filing fees




Rs. 100 per day with effect from 1 July 2018

Author: Ms. Shivani Handa is a qualified company secretary and works as an Associate at NovoJuris Legal.