The share capital of a company shall be of two kinds, namely: —

(a) equity share capital—

  • with voting rights; or
  • with differential rights as to dividend, voting or otherwise.

(b) preference share capital.

While equity shares with voting rights and preference shares are well-known, it’s worth noting that equity shares with differential rights are a less commonly used method for raising funds.

Differential rights shares give the holder differential rights as to dividend, voting or otherwise as compared to someone who owns ordinary shares of a company. This impacts control and decision-making.

Differential rights can have:


Section 43(a)(ii) of the Companies Act, 2013, introduced in 2000, legally recognizes Differential rights shares and allows for their issuance under the conditions specified in the Companies (Share Capital & Debenture) Rules, 2014.

Section 47 relating to voting rights mentions ‘one-share-one-vote’ requirement, however with introduction of Section 43 (a)(ii), Section 47 was also amended to introduce reference to Section 43(a) (ii).

Tata Motors was the first company to issue Differential Rights shares in year 2008 to finance the acquisition of Jaguar-Land Rover without too much of a dilution in the voting power. This case serves as a prime motive of the underlying intent of lawmakers when crafting such regulations.


  1. Differential right shares can be issued at a lower price than ordinary shares and can offer a higher dividend rate.
  2. By issuing inferior rights shares, promoters can raise funds without diluting their ownership structure.
  3. Differential right shares with superior voting rights are issued to promoters to maintain control over ownership and decision-making powers.



To issue shares with differential rights, the company must meet the following criteria:

  • Company’s articles of association must authorise issue of differential right shares.
  • Special resolution of shareholders is required pursuant to Section 62 (1)(c) or Section 42 as applicable.
  • Voting power for these shares must not exceed 74% of total voting power.
  • No defaults in filing financial statements or annual returns for 3 preceding FY.
  • No defaults in paying dividends, repaying deposits, term loans, redemption preference shares or debentures, or statutory payments to employees or in crediting amounts to the IEPF.*

*The company can issue Differential right shares after expiry of five years from end of FY in which default was made good.

  • No penalties by Court or Tribunal under specified Acts in the last three years.
  • The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice–versa.

The Company cannot convert its existing share capital with voting rights into equity shares with differential voting rights and vice versa.



  • the total number of shares to be issued with differential rights;
  • the details of the differential rights;
  • the percentage of the shares with differential rights to the total post issue paid up equity share capital including equity shares with differential rights issued at any point of time;
  • the reasons or justification for the issue;
  • the price at which such shares are proposed to be issued either at par or at premium;
  • the basis on which the price has been arrived at;
  • (i) in case of private placement or preferential issue-
  • details of total number of shares proposed to be allotted to promoters, directors and key managerial personnel;
  • details of total number of shares proposed to be allotted to persons other than promoters, directors and key managerial personnel and their relationship if any with any promoter, director or key managerial personnel;

(ii) in case of public issue – reservation, if any, for different classes of applicants including promoters, directors  or key managerial personnel;

  • the percentage of voting right which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;
  • the scale or proportion in which the voting rights of such class or type of shares shall vary;
  • the change in control, if any, in the company that may occur consequent to the issue of equity shares with differential voting rights;
  • the diluted EPS pursuant to the issue of such shares, calculated in accordance with the applicable accounting standards;
  • the pre and post issue shareholding pattern along with voting rights as specified.



As per rule 4 of the Companies (Share Capital and Debentures) Rules, 2014, board of directors has to disclose in the board’s report for the financial year in which the issue of equity shares with differential rights was completed, the following details, namely:-


The holders of the equity shares with differential rights shall enjoy all other rights such as bonus shares, rights shares etc., which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued.



To sum up, equity shares featuring differential rights offer companies a versatile means of raising funds and acknowledging specific shareholders. Consequently, it represents one of the available options for companies to raise capital, not in the form of a loan, but through ownership stakes. It further enables startups to retain control while raising funds.


Akansha Rathi and Associates (ARACS), based in Navi Mumbai, specializes in compliance services. Our expert team has extensive experience in navigating complex business environments, delivering tailored solutions to meet our clients’ compliance needs.

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