Page 268 - DMGT407Corporate and Business Laws

Unit 11: Prospectus, Shares and Share Capital

to preference shares and preference shareholders can vote on them: (i) any resolution for winding Notes
up of the company; (ii) any resolution for the reduction or repayment of share capital; (iii) any
resolution at any meeting, if dividend on cumulative preference shares remains unpaid for at
least two years. Holders of non-cumulative preference shares shall have a right to vote on all
resolutions, if their dividends are in arrear for the two financial years during a period of six
years ending with the financial year preceding the meeting. [s.87(2)].

11.3.5 Equity Share

‘Equity share’ means a share which is not preference share (s.85). The rate of dividend is not
fixed. The Board of Directors recommend the rate of dividend which is then declared by the
members at the Annual General Meeting. Before recommending dividend on equity shares, the
Board of Directors have to comply with the provisions of law as regards depreciation, transfer
of a minimum amount to reserves, etc.

The holders of equity shares have voting rights in proportion to the paid-up equity capital of the
company [s.87(1)].
Section 86, provides that the new issues of share capital of company limited by shares shall be of
two kinds only, namely: (a) equity share capital – (i) with voting rights; or (ii) with differential
rights as to dividend, voting or otherwise in accordance with such rules and subject to such
conditions, as may be prescribed; (b) preference share capital prior to the amendment to the
Companies Act in 2000, public companies were not allowed to issue equity shares with differential
rights.
Thus, companies are now allowed to issue non-voting equity shares. However, these shares can
be issued subject to the rules and conditions prescribed by the Department of Companies Affairs.
The Department of Companies Affairs has notified the ‘The Companies (Issue of Share Capital
with Differential Voting Rights) Rules 2001’ which, inter alia, provide for the following:
1. Share with differential voting rights, including non-voting shares, cannot exceed 25 per
cent of the total issued share capital.

2. The company issuing such shares must have distributable profits in the three years
preceding such issues.
3. Companies will not be allowed to convert its equity capital with regular voting rights
into shares with differential voting rights and vice versa.
4. Issue of such shares must be approved by the shareholders by way of resolution in a
general meeting: The notice of the general meeting to shareholders shall carry an
explanatory statement detailing, inter alia, the following: (a) voting rights which shares
with differential rights will carry; (b) scale or proportion to which the voting rights of
such shares will vary; (c) that the members holding equity shares with differential rights
will be entitled to bonus and rights shares of the same class.

5. Listed companies must obtain the shareholders’ approval through postal ballot.
6. Companies which have defaulted in filing annual returns during the preceding three
years or have failed to repay their deposits or interest thereon on due date or redeem
debentures on due date or pay dividend after becoming due, will not be eligible to issue
shares with differential rights.
7. Again, companies which have defaulted in addressing investors’ grievances will not be
allowed to issue such shares.

8. Issue of such shares must be authorized by Articles of Association of the company.

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