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  • Dibya Prakash Behera

Update: SEBI Allows DVRs

[The following update has been brought to you by our Editor, Dibya Behera.]

The Securities and Exchange Board of India (SEBI) at its board meeting on June 27, 2019 approved a framework for issuance of differential voting rights shares (DVRs). However, the SEBI discontinued the practice of issue of fractional rights shares by existing listed companies. The matter of issue of fractional rights shares has been kept in the back-burner, with the regulator likely to revisit the proposal depending on the success of the regime currently outlined.

Remarkably, SEBI recognizes two types of DVRs, one being the superior voting rights wherein shares will have superior voting rights as compared to ordinary shares, and the second being the fractional voting rights wherein shares will have lower or fractional voting rights as compared to ordinary shares. DVRs comprise of disproportionate rights as compared to the economic ownership. They can be of varied types such as shares carrying superior voting rights and inferior voting rights or shares with differential rights as to dividend. DVRs have gained prominence among the founders/promoters for they allow them to retain control over the decision making process and rights and to raise funds through shares with superior voting rights.

Under the present framework, a company having superior voting rights shares (SR shares) would be permitted to do an initial public offering (IPO) of only ordinary shares to be listed on the Main Board, subject to fulfillment of eligibility requirements of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018. Certain additional conditions to be complied with are set out below.

  • The issuer company shall be a tech company (as per the definition in Innovators Growth Platform) with the SR shareholder being a part of the promoter group whose collective net worth does not breach the INR 500 crore mark.

  • The tech companies here are defined as those that intensively use technology, information technology, intellectual property, data analytics, biotechnology or nano-technology to provide products, services or business platforms with substantial value addition.

  • Furthermore, the SR shares should have been issued only to the promoters/founders who hold an executive position in the company. The issue should have been authorized by a special resolution passed at a general meeting of the shareholders.

  • Moreover, the SR shares should have been held for a period of at least 6 months prior to the filing of Red Herring Prospectus (RHP). The voting rights shall be in the ratio of minimum 2:1 to maximum 10:1 compared to ordinary shares.

With regard to the listing and lock-in period requirements, the SEBI has mandated that the SR shares shall also be listed on stock exchanges after the issuer company makes a public issue. But that come with a caveat in the form of being under lock-in after the IPO until their conversion to ordinary shares. SEBI has restricted the transfer of SR shares among promoters and also prohibited the practice of pledge/lien on SR shares.

SEBI has ensured that the SR shares shall be treated at par with the ordinary equity shares in every aspect, including dividends, except in the case of voting on resolutions. However, it has restricted the total voting rights of SR shareholders (including ordinary shares), post listing, to 74%. Through such a provision, it has ensured that the cap mentioned under the Companies Act 2013 is still applicable.

Companies having SR shareholders shall be subject to enhanced corporate governance requirements as follows:

  • Atleast one-half of the board and 2/3rd of the board committees (excluding audit committee) as prescribed under the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR) shall comprise of independent directors.

  • Audit committee shall comprise of only independent directors. Promoters/founders will only have the right to subscribe to SR shares.

SEBI has provided for certain circumstances wherein post-IPO, the SR shares shall be treated as ordinary equity shares in terms of voting rights. Such circumstances are laid down as follows:

  • Appointment or removal of independent directors and/or auditors;

  • Cases where the promoter is willingly transferring control to another entity;

  • Related party transactions in terms of LODR involving SR shareholders;

  • Voluntary winding up of the company;

  • Changes in the company’s articles of association or memorandum of assocition - except any changes affecting the SR instrument;

  • Initiation of a voluntary resolution plan under the Insolvency and Bankruptcy Code 2016;

  • 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.

SEBI has also provided for certain events on the onset of which the SR shares shall be converted to ordinary shares. As regards the time-based requirements, the SR shares shall be converted to ordinary shares after 5 years of listing. It has also provided for an extension of 5 years through a resolution. However, such SR shareholder shall not be allowed to vote on such resolutions. As regards the event-based requirements, the SR shares shall compulsorily get converted into ordinary shares on occurrence of certain events such as demise or resignation of SR shareholders, merger or acquisition where the control would be no longer with SR shareholder, etc.

Notably, DVRs are construed as beneficial for companies who are in the nascent stage and are in constant need of funds without posing a risk to the holding of founders/promoters. Most start-up companies will be able to associate themselves as the beneficiaries. Apart from providing an impetus to the start-up companies, SEBI has also ensured that the corporate governance requirements are strict and mandatory. The coal-tail provisions, the restrictions on transfer among promoters, the bar on pledging of such shares etc. amply shows the intent of the SEBI behind such provisions. Apart from encouraging Indian companies to list within India, this will ease the process of IPO of major tech startups in India.


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