Interpretive Guidance: Differential Rights on Shares

Section 86(a)(ii) of the Companies Act, 1956 as well as the Companies (Issue of Share Capital and Differential Voting Rights) Rules, 2001 permit the issue of shares with differential rights as to voting and dividend (DVRs) by companies, subject to certain conditions. Such issue of shares with DVRs has also been implicitly blessed by the Company Law Tribunal in Anand Pershad Jaiswal v. Jagatjit Industries Limited, MANU/CL/0002/2009. Based on this, a limited number of companies, Tata Motors including, had issued shares with DVRs, which have been listed on stock exchanges.
Subsequently, in July 2009, SEBI amended the listing agreement to state that listed companies are prohibited from issuing shares with “superior” voting rights. Clause 28A was inserted in the listing agreement, which states: “The company agrees that it shall not issue shares in any manner which may confer on any person, superior rights as to voting or dividend vis-à-vis the rights on equity shares that are already listed.” This further circumscribed the ability of companies to issue shares with DVRs under the pre-existing legal regime, and the consequences emanating from this change have been the subject matter of previous discussion on this Blog (here and here).
Apparently confounded by this development, Tata Motors, which had issued ‘A’ Ordinary Shares that carried 5% greater dividend than ordinary shares, but only 1/10th of voting rights compared to ordinary shares, approached SEBI for informal guidance. This was to ensure that their existing listed shares with DVRs were not impacted, and furthermore that any fresh issue of similar shares by Tata Motors not only through rights issue, bonus issue or conversion of other instruments but also through public issue, preferential allotment or qualified institutional placement (QIP) was permitted. SEBI issued its informal guidance on April 23, 2010:
i. The existing listed ‘A’ Ordinary Shares will continue to have all their existing rights.
ii. The company may make a fresh issue of ‘A’ Ordinary Shares on the same terms as the existing listed ‘A’ Ordinary Shares by way of a bonus or rights issue.
iii. The company may make a fresh issue of ‘A’ Ordinary Shares by way of a follow on public issue, preferential allotment of ‘A’ Ordinary Shares and QIP of ‘A’ Ordinary Shares, subject to compliance with the SEBI (ICDR) Regulations.
iv. The company may issue ‘A’ Ordinary Shares on exercise of conversion option by holders of Convertible Alternative Reference Securities (CARS) subject to terms and condition[s] of the convertible instrument and fulfillment of other guidelines, regulations and any other applicable laws.
v. The company may issue employee stock options (“ESOPs”) in accordance with the SEBI (Employee Stock Option and Employee Stock Purchase Scheme) Guidelines, 1999 where the options can be converted into ‘A’ Shares on the same terms as the existing ‘A’ Ordinary Shares.
There are possibly three different sets of implications from the guidance.
First, item i. ensures “grandfathering” of the existing shares with DVRs already issued by Tata Motors (prior to the changes brought about by SEBI in July 2009) as they are not affected in any matter.
Second, items ii. and iv. relate to issue of further shares with DVRs arising out of pre-existing obligations, such as conversion of CARS and even possible rights issue or bonus issue where the existing holders cannot be prejudiced merely because they are holding shares with DVRs.
Third, item iii. (and perhaps item v.) whereby Tata Motors is allowed to issue new shares with DVRs (similar to the existing shares) by way of a further offering either to the public or on a private basis.
While the exceptions made for grandfathering the existing shares and for pre-existing obligations arising from those is understandable, there is a question on whether SEBI’s permission to Tata Motors to issue fresh shares with DVRs falls within the overall scheme of SEBI’s guidelines. Whether the ability of Tata Motors to issue such fresh shares arises on account of its specific fact situation (as it has already issued the ‘A’ Ordinary Shares) or whether other companies too would be entitled to avail of this route is an open question. However, it appears more likely that the dispensation is limited to Tata Motors (which is the recipient of the informal guidance, granted on the basis of specific facts and circumstances) and other companies may not be able to rely on it.

For an analysis on these and other issues, please see this discussion on CNBC-TV18 where our guest contributor Somasekhar Sundaresan elaborates.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • In their letter seeking informal guidance – clause 1.9,they did not mention when these CARS were issued which gave the holder the option to convert CARS into "A" shares.

    The CARS to my knowledge where issued about more than 4-5 years ago, when there were no DVR issuance possible (because of lack of rules).

    Thus, the sequence of events were as follows:

    1. Issue of CARS (with underlying as differential shares);

    2. Rights issue of differential shares – terms where such that it could align with the shares underlying the CARS;

    3. Informal Guidance;

    4. Issue of shares underlying CARS which became pari-passu with the shares issued by way of rights at (2) above.


  • Hi… I would like to understand the "capital payment scenario to this class of shareholders in case of winding up of the company". For example: There are two share holders A and B. A is having 10 equity shares with 1 voting rights each and B is having 10 DVRs with 1 voting rights for 10 DVRs. Company goes winding-up, how payment to these two class of shareholders will take place? Who will be paid first and in what ratio?

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