Differential Voting Rights (DVR): Easier Norms and Raised Ceilings

DVR is known as Differential Voting Right and is commonly issued by the companies to prevent hostile takeover and the dilution of voting rights.

understanding Differential Voting Rights

As per the companies act 2013, every shareholder of a company has the right to vote on any resolution that is presented before the company.  The act permits the companies to issue DVR on certain conditions which are to be fulfilled by the company

Differential Voting Right share is just like any other ordinary equity share only with a difference that it provides fewer voting right as compared to ordinary equity.

The companies mostly issue shares with differential voting rights for obtaining investments without offering the voting rights to the investor and hence, in turn, avoiding a hostile takeover of the company.

Why companies Issue DVR Shares?

Companies mostly issue DVR share to ensure that there is no dilution in the voting right and is a common way of preventing hostile company takeover. The companies also issue DVR share to fund projects that are large and also is considered an excellent move for strategic investors.

Eligibility of the company to Issue DVR

A company can issue DVR only if it completes all the given requirements by SEBI and MCA:

  • When the company has distributable profits
  • The Company has not defaulted in the filing of Annual Return and financial statement for at least 3 financial year
  • The companies cannot issue DVR amounting to 74% of the total paid-up share capital (For listed Company)

The changes in the DVR norms will help the startup raise funds without losing the right to vote and will help them ensure that the financial investors have limited control over the company.

Note:  Only tech companies as per SEBI will be able to issue DVR’s to the founders and promoters whose collective net worth doesn’t exceed 500 crores

The Amendment

The companies act and Companies (Share & Debentures) Rules were amended on August 16; where the government lifted the ceiling of DVR’s from 26% to 74% of the total paid-up share capital. The promoters of the company under such requirement will have to cede their control over the company; as a requirement to raise capital through issuing equity to foreign investors.

What is Hostile Takeover?

Acquisition of a company by another company that is accomplished by directly going to the company’s shareholders or by managing to replace the company’s management to get approval for acquisition is commonly known as a hostile takeover of the company.

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