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
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.
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The Ministry of Corporate Affairs notified on June 5, 2015 that certain provisions of the Companies Act, 2013 shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification.
Whilst trade and barter have existed since early times, the modern practice of forming business relationships through the means of contract has come into existence only since the industrial revolution in the West.
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