Rule 4 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 4 lets a company limited by shares issue equity shares with differential rights as to dividend, voting or otherwise, but only if it meets a list of conditions about its articles, approval, voting power, filing record, defaults and penalties. It then requires an explanatory statement with twelve particulars, Board's report disclosures and register entries, and bars conversion of existing equity into differential-rights equity and back.
This article is as amended up to G.S.R. 43(E) dated 21 January 2023 per the MCA e-book. Later amendments should be checked. To issue shares and file the allotment return, see our allotment of shares and PAS-3 service.
A company limited by shares may issue equity shares with differential rights only if its articles authorise it, the issue is approved by an ordinary resolution (by postal ballot for a listed company), the voting power of such shares does not exceed seventy four per cent of total voting power, and it has a clean record on filings, dividends, deposits and penalties in the last three years. Existing equity cannot be converted into differential-rights equity or back.
Rule 4(1): the conditions
No company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise unless it complies with these conditions:
| Clause | Condition |
|---|---|
| (a) | The articles of association authorise the issue of shares with differential rights |
| (b) | The issue is authorised by an ordinary resolution passed at a general meeting; where the equity shares are listed on a recognised stock exchange, the issue is approved by the shareholders through postal ballot |
| (c) | The voting power in respect of shares with differential rights shall not exceed seventy four per cent of total voting power, including voting power in respect of equity shares with differential rights issued at any point of time |
| (d) | The company has a consistent track record of distributable profits for the last three years |
| (e) | The company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares |
| (f) | The company has no subsisting default in the payment of a declared dividend, repayment of matured deposits, redemption of preference shares or debentures that have become due, or payment of interest on such deposits or debentures or payment of dividend |
| (g) | The company has not defaulted in payment of dividend on preference shares, repayment of any term loan from a public financial institution, State level financial institution or scheduled bank that has become repayable or interest payable on it, or statutory dues relating to its employees to any authority, or in crediting the amount to the Investor Education and Protection Fund |
| (h) | The company has not been penalised by a Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act under which such companies are regulated by sectoral regulators |
A proviso to clause (g), inserted by the Amendment Rules, 2016 of 19 July 2016, says a company may issue equity shares with differential rights upon the expiry of five years from the end of the financial year in which such default was made good.
Clause (c) was substituted by the Amendment Rules, 2019 of 16 August 2019: the earlier wording limited the shares with differential rights to twenty-six per cent of the total post-issue paid-up equity share capital, and the current wording limits voting power to seventy four per cent. Clause (d) is printed in the e-book with a footnote saying it was omitted by the same 2019 amendment; check the official text on whether the track record condition now applies. The Acts in clause (h) are quoted as printed; check the current law.
Rule 4(2): the explanatory statement
The explanatory statement annexed to the notice of the general meeting under section 102, or of a postal ballot under section 110, shall contain:
- (a) the total number of shares to be issued with differential rights;
- (b) the details of the differential rights;
- (c) the percentage of the shares with differential rights to the total post-issue paid-up equity share capital, including equity shares with differential rights issued at any point of time;
- (d) the reasons or justification for the issue;
- (e) the price at which the shares are to be issued, at par or at premium;
- (f) the basis on which the price has been arrived at;
- (g) in a private placement or preferential issue, the total number of shares proposed to be allotted to promoters, directors and key managerial personnel, and to other persons with their relationship, if any, to a promoter, director or KMP; in a public issue, any reservation for different classes of applicants;
- (h) the percentage of voting right which the differential-voting equity capital will carry to the total voting right of the aggregate equity share capital;
- (i) the scale or proportion in which the voting rights of that class vary;
- (j) the change in control, if any, that may occur;
- (k) the diluted earnings per share after the issue, calculated per applicable accounting standards;
- (l) the pre- and post-issue shareholding pattern with voting rights, as per clause 35 of the listing agreement issued by SEBI from time to time (quoted as printed; check the current SEBI requirements).
Rule 4(3) to (6): conversion, Board's report, rights and register
- (3) No conversion. The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights, and vice versa.
- (4) Board's report. For the financial year in which the issue was completed, the Board discloses: the total number of shares allotted with differential rights; the details of the differential rights on voting and dividends; the percentage of such shares to total post-issue equity share capital and the percentage of voting rights; the issue price; the particulars of promoters, directors or KMP to whom the shares were issued; the change in control, if any; the diluted EPS for each class; and the pre- and post-issue shareholding pattern with voting rights in the format in sub-rule (2).
- (5) Other rights. Holders of differential-rights shares enjoy all other rights, such as bonus shares and rights shares, which equity holders are entitled to, subject to the differential rights with which the shares were issued.
- (6) Register of Members. It shall contain all relevant particulars of the shares so issued and details of the shareholders under section 88.
An Explanation says equity shares with differential rights issued under the Companies Act, 1956 and its rules continue to be regulated under those provisions and rules. It was substituted by G.S.R. 413(E) of 18 June 2014; check the current law on this point.
Example: Ridgeway Media Limited, an unlisted company limited by shares, wants to issue a class of equity shares with higher voting. Its articles authorise differential rights. It passes an ordinary resolution at a general meeting with an explanatory statement containing the twelve particulars. It checks that voting power of the new shares stays within seventy four per cent and that its filings are up to date. It cannot convert its existing equity shares into the new class.
For the Act's text, see our section 43 guide on types of share capital and section 47 on voting rights. For the rule set in context, see our article on rules 1, 2, 3 and 15.
Need help issuing shares with differential rights?
The conditions, the explanatory statement and the filings must fit together before the shares are allotted. TaxClue can check eligibility, draft the notice and complete the allotment and return; see our allotment of shares and PAS-3 page.
Key takeaways
- Articles must authorise the issue; approval is by ordinary resolution, or postal ballot for a listed company.
- Voting power of differential-rights shares must not exceed seventy four per cent of total voting power.
- Filing, dividend, deposit and penalty conditions apply; a default cured can be revisited after five years from the end of the financial year of cure.
- The explanatory statement has twelve items; the Board's report has eight disclosures.
- No conversion of existing equity into differential-rights equity or back.
Read next
- Rules 1, 2, 3 and 15: scope, definitions and the SH-7 notice
- Rule 13: preferential allotment
- Companies Share Capital Rules, 2014: guide
- Section 43 of the Companies Act, 2013: types of share capital
Disclaimer: Based on the Companies Act, 2013 rules named above as consolidated in the MCA e-book (consulted on 3 October 2026), with the later notifications the article names. Later amendments, fees, forms and the Companies Act, 2013 provisions referred to should be checked. This article is general information, not legal advice; check the official text before acting.