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Regulatory Alert: SEBI approved the differential voting rights (DVRs) framework

02 July 2019

SEBI had released a Consultation Paper on  20 March 2019 for public comments on Issuance of shares with Differential Voting Right (“DVR Shares”). Based on the recommendations of Primary Market Advisory Committee (‘PMAC’) and the public comments, the Securities and Exchange Board of India (‘SEBI’) vide its press release dated 27 June 2019 (PR No. 16/2019) approved introduction of a new framework for issuance of DVR shares.

In this press release, SEBI has also approved few amendments to the existing SEBI (Listing Obligations and Disclosures Requirements) Regulation 2015 (‘SEBI LODR’),  SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (‘SEBI Takeover Code’) and SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘SEBI Insider Trading’).

New framework for issuance of DVR Shares

Under the existing regulatory regime for listed company, DVR Shares with superior voting rights as to voting or dividend are not permitted. However, in order to facilitate the issuance of DVR Shares, SEBI has approved amendments to the relevant regulations to permit issuance of shares with superior voting right only. The key proposals in relation to superior voting right shares as approved by SEBI are summarized below:


Coat-tail Provisions

Unlisted company having superior voting rights shares (‘SR shares’) would be permitted to do an IPO only for its ordinary shares in accordance with SEBI ICDR regulations subject to the following additional conditions:

  • The issuer company is a Tech company
  • The SR shareholder should:
    • Form part of the promoter group whose existing collective net worth (excluding investment in issuer company) does not exceed Rs 500 Crore
    • Holds an executive position in the company.
  • Issue of SR shares to be authorized by a special resolution of the shareholders.
  • SR shares have been held for a period of at least 6 months prior to the filing of Red Herring Prospectus.
  • SR shares have voting rights in the ratio of minimum 2:1 to maximum 10:1 compared to ordinary shares.

Post-IPO SR, Equity Shares shall be treated at par with the ordinary equity shares in terms of the voting rights, in the following circumstances:

  • Appointment or removal of independent directors and/or auditor;
  • In case where promoter is willingly transferring control to another entity
  • Related Party Transactions
  • Voluntary winding up of the company
  • Changes in the company’s AOA or MOA - 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.

Listing and Lock-in conditions for SR shares:

Sunset Clauses:

  • Mandatory listing after public issue
  • Lock-in until conversion to ordinary shares
  • Prohibition for transfer of SR shares amongst promoters
  • Pledge/ lien also not allowed

SR shares shall be converted into ordinary shares in following circumstances/ events:

  • Time Based i.e. on the 5th anniversary of listing with one-time extension of 5 years.
  • Event Based i.e. on occurrence of certain events such as demise, resignation of SR shareholders, loss of control of SR shareholders in merger and acquisition

Rights of SR shares

Fractional Rights Shares:

  • Treated at par with the ordinary equity shares in every respect, including dividends, except voting on resolutions.
  • The total voting rights of SR shareholders (including ordinary shares) is restricted to 74% (vis-à-vis 75% in case of company having only ordinary shares).
  • Henceforth, issuance of fractional rights shares ((i.e. shares with inferior right to voting or dividend) by existing listed companies shall not be allowed

Enhanced corporate governance

Representation of independent directors in Board of Directors and various committees would be as follows:

  • Board of Directors: Minimum 50% (vis-à-vis 1/3rd)
  • Audit Committees: 100% (vis-à-vis 2/3rd)
  • Other Committees (Nomination, Remuneration etc.): Minimum 2/3rd (vis-à-vis 50%)

For the purpose of the above, the tech companies would be as defined in Innovators Growth Platform i.e. companies which are intensive in the use of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology to provide products, services or business platforms with substantial value addition.

Increased limits for payments to related party for royalty and brand usage

Under the existing SEBI LODR and with effect from 01 July 2019, the payments to related parties for royalty and brand usage exceeding 2% of the annual consolidated turnover of the listed entity during a financial year was considered material & required approval of shareholder, with no related party having a vote to approve such resolutions.

Now, the threshold limit for payments to related parties for royalty and brand usage exceeding 5% would be considered material requiring shareholder’s approval.

Disclosure of Encumbrances:

In context of recent concerns wherein promoters raising funds from Mutual Funds/ NBFCs through structured obligations, pledging, promoter guarantees, non-disposal of shares or other complex structure, the definition of encumbrance and disclosure norms therefor has been widened.

The definition of “encumbrance” as provided in SEBI Takeover Code shall henceforth include :

  • any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly;
  • pledge, lien, negative lien, non-disposal undertaking;
  • any covenant, transaction, condition or arrangement in the nature of encumbrance, by whatever name called, whether executed directly or indirectly.

Further, Promoters are now required to disclose detailed reasons for encumbrance whenever the combined encumbrance by promoters and persons acting in concert (PACs) crosses 20% of the total share capital in the company or 50% of their shareholding in the company.

Promoters are also required to make an annual declaration to the audit committee and stock exchanges about the accuracy and completeness of disclosures in relation to the encumbrances made by them during the financial year.

Amendment to SEBI (Prohibition of Insider Trading) Regulations, 2015

Under the existing SEBI Insider Trading regulations, listed entities are required to close their trading window from end of every quarter till 48 hours after declaration of financial results. In the current meeting, SEBI has clarified that the trading window closure shall not be applicable in the following cases:

  • off-market inter-se transfer between insiders,
  • transaction through block deal window mechanism between insiders
  • transaction due to statutory or regulatory obligations,
  • exercising of stock options,
  • pledging of shares for bona fide transaction such as raising of funds
  • transactions for acquiring shares under further public issue, right issue and preferential issue,
  • exercising conversion of warrants / debentures,
  • tendering shares under buy-back,
  • open offer and delisting etc. under respective regulations


BDO Comments:

  • DVR Shares with SRs will be a boost for listing of new age / tech based companies which have raised funds from investors, without diluting control. However, the success of these relaxations would need to be evaluated under the Companies Act, 2013 which requires consistent track record of distributable profits for 3 years and maximum limit of DVR upto 26% of total paid-up capital.
  • Issue of DVR Shares with fractional rights has not been so popular in India and shares with fractional rights are generally traded at discount. However, abolishment of the same in the revised regulatory framework would completely restrict the existing listed company to access the DVR route.
  • The higher composition of independent directors in Board of Directors and various committees and prohibition of superior rights for key resolutions is commendable and would help to protect the interest of public shareholders. Further, limiting the voting rights of SR shareholders at 74% (including SR’s shares) would ensure that such SR shareholders cannot pass a special resolution unilaterally.
  • The changes proposed in the SEBI LODR for enhancement of threshold limit to 5% for payment towards royalty to related party, widening the definition of encumbrances and disclosures norms under the Takeover Code and relaxation for certain transactions out of trading window closures are welcome steps to align the regulations with current business practice and coping with the practical difficulties and challenges.