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Law permits issue of superior voting rights

H.P. Ranina/NRI Problems/Dubai
Filed on January 5, 2020
The Ministry of Corporate Affairs and SEBI permit companies to issue instruments with differential voting rights.

Equity shares can now be issued by both private and public companies where one class of shares would have extra voting rights than the ordinary equity shares.

Q: My son and his colleagues want to set up a biotechnology company in India. They will invite subscription to the share capital from their relatives and friends. My son and other promoters want the new company to issue shares to them on the basis of superior rights. I am not able to understand whether this is possible because all equity shareholders should have the same rights.

A: The Ministry of Corporate Affairs and the Securities and Exchange Board of India (SEBI) permit companies to issue instruments with differential voting rights. Therefore, equity shares can now be issued by both private and public companies where one class of shares would have extra voting rights than the ordinary equity shares. Such special category of equity shares provides superior voting rights (SRs) but not additional dividend as compared to ordinary equity shares. In other words, dividend would be at the same rate for all classes of equity shares. The articles of association of the company should permit the issue of SRs.
Therefore, your son and his friends can form a company that would issue equity shares with superior voting rights to the promoters. As and when the company is listed on a stock exchange, the promoters/founders to whom SRs are issued should be those who are in an executive position in the company. SRs can be given two to 10 times extra voting rights as compared to ordinary equity shares. Certain other conditions have to be fulfilled in conformity with the regulatory provisions. The law permits the issue of SRs as many promoters may have the technology but have to depend on substantial capital from investors. To protect the interest of such promoters, the law permits issue of SRs with additional voting rights so that they can retain control over their company.

Q: A group of NRIs are planning to set up a store in India for selling goods and products which are popular with senior citizens. I am sceptical about the viability of this project. Is any information available on the size of the market for senior citizens?

A: According to a study recently conducted by the Confederation of Indian Industry, there is a growing class of consumers in India referred to as 'senagers'; this class comprises of persons who are 60 years and over. Their spending power and disposable income are fairly high. According to this study, the market for lifestyle products consumed by senagers is around ?430 billion. According to the report, the population of senagers is more than 25 per cent of the total population.

Many shopping destinations have created dedicated areas to cater to the needs of senagers. It has been found that they have a significant presence both on weekdays and weekends at malls and shopping centres. Apart from buying goods for themselves, they are found to be compulsive buyers for their children and grandchildren. Senagers also avail of banking and financial services, apart from having a substantial share of the pharmaceutical and medical services market. This population is growing at three per cent per annum and, therefore, the potential for catering to their needs and providing services to them is extremely promising.

Q: My brother suffered injuries in an accident while driving a bike in Mumbai. He had filed a claim for compensation under the Motor Vehicles Act. The compensation amount was increased by the court subsequently and interest in respect of such compensation was also made payable to my brother. The tax department has sought to tax the amount of compensation as well as the interest received thereon. A large amount is demanded from my brother. Are the tax authorities justified in taxing such amounts?

A: The Motor Vehicles Act of 1988 provides for payment of compensation where a person has sustained any injury or died in an accident. An injury may lead to permanent or temporary disability and the compensation awarded to a victim is the measure of damages for a pecuniary loss suffered by him. Courts have, therefore, taken a view that the compensation payable under this act is not in the nature of income but it is a capital receipt. Under the act, a special claims tribunal has also been set up which is required to pass an award on the question of adequacy of compensation. The tribunal can increase the amount of compensation and also award interest on the original amount.
In view of the decisions of courts, which have been considered in great detail by the Bombay High Court in a recent case, the tax department cannot assess the compensation and interest paid thereon as income under any provision of the Income Tax Act. The interest paid on such compensation partakes the character of compensation and, therefore, it is not in the nature of income which is liable to tax either under section 56 or under section 145-B. Hence, your brother should immediately file an appeal before the commissioner (appeals) against the assessment order as no amount is liable to tax and the assessment made is contrary to judgments of courts.

The writer is a practicing lawyer, specialising in tax and exchange management laws of India.



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