The Article on 'Evolution of differential rights in India' is about one of the most important concepts in Company law and is widely prevalent across the globe. The article discusses the history and evolution of Differential voting rights in India and analyses its impact on the rights of shareholders and corporate governance practices. It discusses the legislative framework of DVRs and the amendments and regulatory changes which took place over the years.

The content of the article is prepared after a due reference from various sources such as online journal articles, news articles, essays, etc. which provides a comprehensive understanding of the topic and provides credible inputs regarding the topic. The article is an attempt to present the chronological development of differential voting rights in India and its impact on various stakeholders.

Differential Voting Rights in India

Differential rights in India are one of the novel and emerging concepts in Indian Company Law. As per an article[1], the concept of differential rights was introduced in the year 2000 in India through an amendment in Section 86 of the Indian Companies Act, 1956. The Section stated that shareholders may have differential rights in terms of dividend and voting rights.

The share capital was classified into two types- Equity Share Capital and Preference Share Capital. Differential Voting Rights (DVRs) were further categorized by SEBI into two types, Shares with Superior Voting Rights (SR Shares) and Shares with Fractional Voting Rights (FR Shares). The SR shares have superior voting or dividend rights in comparison to ordinary shares while the FR Shares have inferior voting rights in comparison to ordinary shares. The basic function of DVR Shares is to enable the companies to raise capital without reducing the control and the decision-making power in the company.

Till 2009, very few companies took the initiative and issued shares with differential rights. For example, Tata Motors issued DVR shares in the year 2008, which carried a 1/10th voting right and a 5% higher dividend on these shares in comparison with the ordinary shares. Similarly, in the year 2009, Pantaloon Retails issued DVRs which carried 1/10th voting rights as compared to the ordinary shares and a 5% additional dividend.

Late in the year 2009, SEBI, through an amendment, prohibited the listed companies from issuing DVR Shares with superior voting or dividend rights and stated that this leads to the exploitation of the minority shareholders. This implied that only Fractional Voting Rights could be issued by the listed companies.

After a few years, with the commencement of the Indian Companies Act 2013, Section 43 of the said Act ensured that DVRs receive legal recognition and the companies could issue equity shares with differential rights. Section 48 of the Indian Companies Act, 2013 further elaborates on the variations of shareholder's rights and also lays down the procedure to initiate such variation.

Further, the Rule 4(1) sub-rule (c) of the Companies (Share Capital and Debentures) Rules, 2014, stated that the voting rights with regard to the issue of DVR Shares "should not exceed 26% of the total post issue paid up equity share capital including equity shares with differential rights issued at any point of time." Rule 4 of the said Rules also laid down certain essentials for the issuance of DVRs'. A few of them were, firstly, that the Article of Association (AOA) of a company should authorize the issue of shares with differential rights, secondly, the issue of shares with differential rights is authorized by an ordinary resolution passed at the shareholders' general meeting and lastly, the company should have a continuous record of distributable profits for the last three years.

As per a recent article[2], The Companies (Share Capital and Debentures) Rules, 2014 were later amended in the year 2019. The Rule/clause 2 sub-rule (i) of the Companies (Share Capital and Debentures) Amendment Rules, 2019 increased the voting power with regard to the DVRs from 26% to 74% of the total voting power. On March 20, 2019, a Consultation Paper was released by SEBI which promoted the issuance of shares with differential rights.

SEBI encouraged the issuance of Superior Voting Rights Shares and Fractional Voting Rights Shares for new technology firms, and the rules and regulations for issue of DVRs were deeply analyzed across different jurisdictions through the 2019 Consultation paper. The amendment also removed the requirement that a company must have a record of distributable profits for the previous three years. The amendment was a measure to encourage more companies to issue shares with differential rights.

In the year 2021, an amendment took place wherein a few of the conditions were removed to make the procedure of issuance of DVRs simpler and smoother. The requirements regarding the public offering of the ordinary shares for listing before the issue of Superior Voting Rights Shares (SVR) and the "lock-in period for holding the SR shares six months prior to the filing of the red herring prospectus" were revoked. SEBI has also established a regulatory framework for business promotors, holding SR Shares to offer ordinary shares to the general public. Through the various amendments, it has been ensured that rules and regulations related to DVRs are liberalized to encourage more investment and increase the profitability and development of technology and innovation-based businesses.

Conclusion
To conclude, there has been constant change in the laws and regulations related to DVRs in India since the year 2000. Regulators are continuously trying to make the process of issuance of DVRs easier by removing unnecessary restrictions and encouraging the concept of DVRs in Indian companies. The liberalized framework has enabled investors to focus on earning higher dividends and increasing profitability.

Constant debates, discussions, and conferences would help dive deeper into the concept of DVRs and would help in formulating new regulations to resolve different issues which emerge with the evolution of DVRs in India. The policymakers, shareholders, and the public at large should have an adaptive approach towards the concept of DVRs to reap greater benefits in the future. The concept is gradually evolving in Independent India and the regulators are ensuring that the issuance of DVR proves advantageous for the Indian economy.

End-Notes:

1. [Rajashree Devchoudhury], [India: Differential Voting Rights  A Struggle For Power], [Mondaq] [(31-05-2023, 10:00 am)], [https://www.mondaq.com/india/shareholders/842948/differential-voting-rights--a-struggle-for-power ]
2. [Nisha Mallik, Neha Mirajgaoker ], [ Differential voting rights may finally be accepted], [India Business law Journal] [(01-06-2023, 10:35 am)], [< https://law.asia/differential-voting-rights-finally-be-accepted/>]

Written By: Devyanshi Gupta, 3rd Year BBA LLB(Hons.) Student, BML Munjal University, Gurugram