To prevent excessive concentration of control among a group of shareholders, describe with the help of an example how the Companies Act, 2013,…

The Companies Act, 2013, allows companies to issue equity shares with differential voting rights (DVRs), which provide different voting power compared to ordinary equity shares. However, to prevent excessive concentration of control in the hands of a few shareholders, the Act places specific restrictions on the total voting power that can be assigned to DVR shares. Conditions to issue shares with differential rights The company should have filed annual returns and financial statements for the last three financial years.The company must obtain shareholder approval through a ordinary resolution.The company must have a consistent track record of profitability.There should be no default in the payment of dividends, interest, or repayment of loans. According to Equity Shares with Differential Rights [Rule 4 of the Companies (Share capital and Debenture) Rules, 2014], a company can issue shares with differential voting rights, but the total voting power of such shares cannot exceed 74% of the total voting rights at any point in time. This ensures that at least 26% of the total voting power remains with ordinary equity shareholders, thereby maintaining a balance in decision-making. Example to understand the above rule. Hind Ltd. has 2,000 total shareholders, including: Regular Equity Shareholders (with normal voting rights) DVR Shareholders (with differential voting rights) Step 1: Understanding Voting Power Distribution Let's assume Hind Ltd. issues DVR shares where each shareholder has twice the voting power compared to regular equity shareholders. Regular Equity Shareholders = 600 shareholders → 600 votes DVR Shareholders = 400 shareholders → Each holding 2 votes → 800 votes Total Voting Power in the Company = 600 + 800 = 1,400 votes Step 2: Applying the 74% Rule 74% of 1,400 total votes = 1,036 votes The DVR shareholders collectively hold 800 votes, which is below 1,036 votes. Hence this provision strikes a balance by allowing companies to issue differential voting rights shares and restrict the over concentration of power with dominating few group of peoples. By capping DVR voting power at 74%, the company ensures that the control is not excessively prejudiced in favor of DVR shareholders.