Had this column been written before December 2000, a clear conclusion would have been that a public limited company cannot issue equity shares of different classes while it could issue preference shares of different classes.

This is because, pre-December 2000, there was Section 88 in the Companies Act, 1956, which prohibited companies from issuing equity shares with disproportionate rights with respect to dividend or voting right or in any other manner.

The language used in Section 88 was such that it exempted preference shares from this restriction, which meant that preference shares with disproportionate rights could be issued. For example, two classes of preference shares (Class A and Class B) could be issued, with one class enjoying seniority or superiority over the other class in the payment of dividend during the lifetime of the company or in the liquidation proceeds in the event of the company winding up.

In other words, Class A preference shares (senior preference shares) could have been paid before the Class B preference shares (junior preference shares) were paid. Times changed, and there was liberalisation in December 2000. While Section 88 was shown the door, an amended Section 86 came in, which permitted issue of equity shares with differential rights.

Thus, the year 2000 marked the birth of equity shares of different classes. Interestingly, but perhaps unintentionally, when Section 88 was abolished, with the intent to give way to equity shares with differential rights, the exemption that was available to preference shares also got abolished. As a result, while equity shares with different classes were born, (perhaps unintentionally) preference shares with different classes were killed.

Given this situation, question arises whether a public limited company can issue preference shares with differential rights if the preference shareholders agree. Will such issue be good in law? The answer is not as obvious as it looks. On a strict legal interpretation, one could argue that since the exemption available to preference shares in Section 88 has been deleted, and with no provision being made in Section 86 permitting preference shares with differential rights, preference shares with differentials rights cannot be issued.

Such strict argument, if accepted, may not find favour with the spirit and intent of the company law. This would needlessly place preference shares in a disadvantageous position than equity shares. It will defeat logic that while equity shares with differential rights are permissible, the same is not the case with preference shares, particularly, when pre-December 2000, they enjoyed such a privilege.

Therefore, a good view can be taken that the company law does not prohibit the issue of preference shares with differential rights, and preference shares of the kind of Class A and Class B can be issued. In order to ensure enforceability of these shares, it is important that specific terms of their issue are clearly incorporated in the contractual documents executed between the shareholders as well as in the articles of association of the company issuing these shares.

Having set the discussion for public company above, the position with respect to private companies, which are known to be less regulated, is that they are in any case free to issue any kind of shares, therefore, issue of different classes of preference shares is completely permissible by such companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.