Share capital in a company limited by shares can be classified in two buckets- equity and preference capital.
Equity shares can be with voting rights or with differential rights with respect to voting, dividend or any other criteria.
To know more about differential right shares please refer to our separate blog Differential Right Shares Under Companies Act 2013 – Akansha Rathi and Associates (aracs.in).
The definition of equity share capital in Act covers any capital that is exclusive of preference share capital.
Preference share capital means any capital that carries preferential right with respect to payment of dividend and/or repayment in case of winding up.
Variation in shareholder’s rights refers to any alteration or modification in the rights attached to a particular class of shares. This can encompass a wide range of changes as under:
- Dividend rights,
- voting rights,
- preferential treatment in the event of liquidation.
REGULATORY FRAMEWORK AND PROTECTIONS FOR VARIATION
Under Section 48 of the Companies Act 2013, Where a company’s share capital is categorized into different classes of shares, the rights associated with shares of any class may be altered under certain conditions:
- CONDITIONS FOR VARIATION:
(a) enabling provision in memorandum or articles for the variation, OR
(b) the variation is not prohibited by the terms of issue of the shares of that class.
Further if variation effects the rights of other class of shareholders, special resolution of such other class is required.
For instance, if conversion ratio of preference shares is being varied to increase the number of equity shares that they will be entitled to post conversion, rights of equity shares is being affected as there will be more dilution and percent of shareholding of equity shares shall reduce post conversion of preference shares, hence in this scenario special resolution consent of equity shareholders is required for the variation.
- CONSENT REQUIREMENT
Consent in writing– of at least 3/4 of shareholders of the issued shares of that class and ‘other class’ if the variation by one class affects the rights of the ‘other class’ of shareholders,
OR
Special resolution– such variations can be approved through a special resolution passed at a separate meeting of the holders of the issued shares of that class and ‘other class’ if the variation by one class affects the rights of the ‘other class’ of shareholders.
- SHAREHOLDER PROTECTION
An application can be made to jurisdictional National Company Law Tribunal (NCLT) to have the variation cancelled, in case holders of at least 10% of the issued shares of a class did not consent or vote in favor of the special resolution.
Such application must be made within 21 days from the date of consent or passing of the resolution and can be initiated by shareholders appointed in writing to represent other shareholders.
The company is required to file a copy of the Tribunal’s order within thirty days of its issuance with the Registrar.
- COMPLIANCE
Filing of MGT-14 for the special resolution passed in the general meeting with the Registrar of Companies is required within 30 days of passing the resolution.
CONCLUSION
In recent times, we have witnessed many instances where shareholders of public companies have gone all out and voted for matters contrary to Promoter’s voting rather than be just mute spectators. This is an encouraging trend, as judicious exercise of shareholder rights are the pillar of strong corporate governance in any organization. Active participation is the responsibility of every shareholder and it will ensure that corporate decisions are made with broader consultation and consensus and hence are equitable.
Akansha Rathi and Associates (ARACS), Company Secretary Firm in Navi Mumbai is engaged into compliance related services. We have a team of experts who not only possess required skills and experience but also have worked in complex business environment and were engaged in providing complex solutions in terms of providing related Compliance services to our clients.