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Differential voting right (DVR) shares are same as ordinary equity shares except such stock does not dilute the promoters voting rights and makes it difficult for hostile takeovers. In simple words DVR shares do not have any voting right but they have right to dividend etc. DVR shares can be issued to small investors who are not concerned with voting right but only the profits or exit in the company.
Ideally DVR should be issued to andel and early stage investors if the founders do not want to loose the control.
What are the conditions to issue DVR?
The company should be registered under startup India scheme. This is the only condition to issue DVR’s.
Earlier there were conditions like
- The company should have been profitable for preceding 3 years
- The DVRs can constitute only 26% of the paid up capital post issue
Requirements to issue DVR
- Company should not have made default in filling Financial Statement & Annual Return for last Three (3) Years.
- The AOA of the company should authorise the issue of shares with differential voting rights
- No default shall be made in payment of declared dividend, repayment of matured deposits or redemption of its preference shares/debentures/payment of any interest thereon.
- Company has not been penalized by court/Tribunal during the last three years of offence under:-
-FEMA Act
-Special Act
Is it beneficial for startup founders to issue DVR Shares?
The biggest advantage of the issuance of DVRS is that it goes a long way in the protection of the rights of the founders and minority stakeholders. The management of company does not get diluted by increasing number of shareholders. The management and control remain in the hands of handful of founders and yet the company can satisfy its ever-increasing capital requirements without much complexity. Since, the administration and control of the company is in safe hands the chances of hostile takeovers and related threats are reduced.
DVRS if given a comprehensive glance, seems to be a perfect device for passive investors. It is an ideal investment strategy for those who want to earn more dividends without much painstaking. Moreover, the holders of DVRS enjoys all other rights such as bonus shares, rights share etc., which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued.
About Rohit Lohade
Rohit Lohade is a Chartered Accountant with 15+ years of experience. He has assisted more than 300 Gobal Companies with India Entry Strategy