SEBI approves framework for issuance of Differential Voting Rights (DVR) Shares

The Securities and Exchange Board of India (SEBI) in its Board Meeting held on June 27, 2019 approved the framework for issuance of differential voting rights shares after an increasing debate about the need to enable issuance and listing of such shares commonly known as DVRs facilitating the Companies to raise capital without necessarily diluting management control.

Shares carrying DVRs have disproportionate rights as compared to their economic ownership, and as such, go against the principle of one share one vote. DVRs may be in the form of

I. shares carrying superior voting rights (i.e. one equity share carrying multiple votes)

II. fractional voting rights (i.e. a fraction of the voting right on an equity share), or

III. shares with differential rights as to dividend.

Background

In the year 2000, the Companies Act, 1956 was amended to allow issuance of shares with differential rights under Section 86.

However, in 2009, SEBI prohibited issue of shares with ’superior voting rights’ by listed companies, in order to “avoid the possible misuse by the persons in control to the detriment of public shareholders”.

Later, after the introduction of 2013 Companies Act, Section 43 allowed public as well as private companies to issue shares with differential rights as to voting, dividend etc.

However, Regulation 41 of SEBI LODR which came into force in the year 2015 prohibited listed entities to issue shares in any manner which may confer on any person, superior rights as to voting or dividend vis-à-vis the rights on equity shares that are already listed.

Framework for Issuance of Differential Voting Rights (DVR) Shares

On 20th March, SEBI released a Consultation Paper on Issuance of Shares with Differential Voting Rights and invited public comments by 20th April. The consultation paper had proposed two structures for the issuance of DVRs: (i) shares with superior voting rights as compared to ordinary equity shares; and (ii) shares with fractional voting rights as compared to ordinary equity shares.

SEBI, after considering the recommendations of the Primary Market Advisory Committee (PMAC) and the public comments on the Consultation Paper approved the framework for issuance and listing of shares with superior voting rights (SR shares). However, the issue of fractional rights shares by existing listed companies has been put to the backseat and it may be reviewed after gaining enough experience with the use of SR shares.

1. Only Tech Companies having SR shares would be permitted to do an initial public offering (IPO) of only the ordinary shares to be listed subject to the fulfilment of requirements under SEBI ICDR.

2. SR shares also to be listed on Stock Exchanges only after the issuer company makes a public issue of the ordinary shares. However, SR shares shall be under lock-in after the IPO until their conversion to ordinary shares.

3. The SR shares shall inter-alia be converted to ordinary shares on the 5th anniversary of listing. The validity can be extended once for a period of another 5 years by passing a shareholders’ resolution where SR shareholder would not be permitted to vote.

4. The SR shares should have been issued only to the promoters/ founders whose collective net worth does not exceed Rs.500 Crores and who hold an executive position in the company having voting rights in the ratio of minimum 2:1 to maximum 10:1 compared to ordinary shares.

5. The total voting rights of SR shareholders (including ordinary shares), post listing, shall not exceed 74%.

6. Post-IPO, SR shares shall be treated at par with the ordinary equity shares in every respect, including dividends, except in the case of voting on resolutions. However, in the following circumstances, the SR Equity Shares shall be treated as ordinary equity shares in terms of voting rights also (i.e. one SR share shall have only one vote):

• Appointment or removal of independent directors and/or auditor;
• In case where promoter is willingly transferring control to another entity
• Related Party Transactions in terms of SEBI(LODR) Regulations involving SR shareholder
• Voluntary winding up of the company;
• Changes in the company’s Article of Association or Memorandum - except any changes affecting the SR instrument
• Initiation of a voluntary resolution plan under IBC;
• Utilization of funds for purposes other than business
• Substantial value transaction based on materiality threshold as prescribed under LODR;
• passing of special resolution in respect of delisting or buy-back of shares; and
• Any other provisions notified by SEBI in this regard from time to time.

7. Companies having SR shareholders shall be subject to enhanced corporate governance where Audit Committee shall comprise of only Independent Directors and at least ? of the Board and 2/3rd of the remaining Committees as prescribed under SEBI (LODR) Regulations, 2015 shall be independent.