The Securities and Exchange Board of India (SEBI), the securities market regulator, recently published a consultation paper on the issuance of shares with differential voting rights (DVRs). SEBI recognizes that such a structure is essential for promoters who play an important role in the success of their companies. This will enable them to raise funds without dilution of control in the company. Such structures can also serve as defence mechanisms against hostile takeovers of companies.
Many countries, including the US, Canada, Hong Kong, Singapore, have permitted DVR structures for their companies. Some Fortune 500 companies like Alphabet (a legal entity of Google), Facebook, Nike have already implemented DVR structures.
Currently, listed companies in India can issue shares with differential rights. However, such shares cannot have superior rights in terms of voting or dividend as compared to normal equity shares. Gujarat NRE Coke Ltd., Jain Irrigations Systems Ltd. etc. are among the few listed companies in India that have issued shares having DVRs.
SEBI through this consultation paper proposes to structure the regulation of DVR issuance.
The consultation paper broadly prescribes issuance of shares with DVRs under 2 scenarios - first for companies that have already listed their equity shares and wish to list DVRs and,second, for companies that are unlisted but propose to list their equity shares. Further, it divides the DVRs issuance into two classes - 'SR shares' which means shares with superior voting rights and 'FR shares' which means shares with fractional or inferior voting rights as compared to ordinary equity shares.
Companies whose equity shares are already listed for at least a year can issue FR shares whereas SR shares can be issued only by unlisted companies,which are proposed to be listed. Issuance of SR shares is not permitted once the company is listed. While FR shares can be issued to all equity shareholders, including promoters, SR shares can be only issued to promotors. This is in line with the intention to allow promoters,to maintain their controlling stake.
Further, in terms of voting and other rights, rights of FR shares as compared to equity shares should not exceed the ratio of 1: 10, whereas SR shares as compared to equity shares shall have the maximum rights of 10:1.
In the case of listed FR shares, at least 25 percent of shares are required to be held by public shareholders, while SR shares should be fully owned by promoters.
It is interesting to note that the consultation paper narrates several restrictive conditions on SR shares such as perpetual lock-in, which means that promoters will neither be able to transfer their SR shares nor will they be allowed to pledge these shares. Even the transfer of SR shares within the promoter group is not permitted. Further SR shares need to be mandatorily converted into ordinary shares on or before the completion of five years of the listing of ordinary shares of the company.
The paper also has other conditions prescribed for shares having superior or inferior rights. The regulator has kept it open by inviting comments on the paper.
DVRs (SR / FR) will certainly help promoters who intend to raise funds from investors without diluting control.
Nitesh Mehta and Anish Shah are, respectively, Partner and Director (Transaction Tax) BDO India.