In its Board meeting dated 27 June 2019, SEBI approved the framework for issuance of Differential Voting Rights (DVR) shares by way of Superior Voting Rights shares (SR shares). This framework is based on the recommendations of the DVR Group, constituted by SEBI from members of its Primary Market Advisory Committee, in its Report of February 2019, following which SEBI released a Consultation Paper on ‘Issuance of shares with Differential Voting Rights’ on 20 March 2019.
The Report suggested the need for DVRs, especially for new technology firms having asset light models with little or no need for debt financing. It was felt that such companies continuously require to grow only through equity and as the raising of equity may lead to dilution of the founder/promoter stake, the use of DVRs could be helpful in retaining the founder’s control and interest in the business and thereby bring value to shareholders. This could be achieved by (i) issue of shares with superior voting rights to founders (SR Shares) and/or (ii) issue of shares with lower or fractional voting rights to raise funds from private/public investors (FR Shares).
SEBI has, for now, approved the recommendations only with respect to DVR by way of SR shares. Fractional Rights Shares by existing listed companies has not been permitted for now.
Listing and Lock-in: SR shares will also be listed on Stock Exchanges after the issuer company makes a public issue. However, these shares will be locked-in after the IPO until their conversion to ordinary shares. Transfer of SR shares among promoters is not be permitted, so also no pledge/ lien on SR shares shall be allowed.
Rights of SR shares: SR shares will be treated at par with ordinary equity shares, including dividends, except in case of voting on resolutions. The total voting rights of SR shareholders (including ordinary shares) should not exceed 74%.
Enhanced corporate governance: Independent Directors should comprise at least one half of the Board and two-thirds of the Committee (excluding Audit Committee) shall comprise of only independent directors.
Coat-tail provisions: Post IPO, SR Equity Shares will be treated like ordinary equity shares in terms of voting rights (one SR Share having only one vote) in the certain circumstances, namely, appointment or removal of independent directors and/or auditor; where promoter is willingly transferring control to another entity; a RPT involving SR shareholder; 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.
Sunset clauses: Conversion of SR shares to ordinary shares will be Time based or Event based. The SR shares shall be converted on the 5th anniversary of listing. Their validity can be extended once by 5 years through a resolution on which SR shareholder will not be permitted to vote. They may be also be converted on occurrence of certain events such as demise, resignation of SR shareholders, merger or acquisition, where the control would be no longer with SR shareholder.
Consequential amendments to SEBI Takeover Regulations 2011, LODR Regulations 2015, Delisting Regulations 2009 and Buy-Back of Securities Regulations 2018, with effect from 29 July 2019
Under the General Exemptions provided in Regulation 10, a new subsection (2A) exempts from the obligation to make an open offer an increase in the voting rights of any shareholder beyond the threshold limits stipulated in sub-regulations (1) and (2) of regulation 3, without the acquisition of control, pursuant to the conversion of SR shares into ordinary equity shares.
Board of Directors: Where the listed company has outstanding SR shares, at least half of the Board must comprise of independent directors [sub-clause(d) to clause (1) of Regulation 17 inserted]]
Composition of Committees: Where the listed entity has outstanding SR shares, the Audit Committee must comprise only of independent directors and the Nomination and Remuneration Committee, the Stakeholders Relationship Committee and the Risk Management Committee shall have at least two thirds independent directors [Regulations 18, 19, 20 and 21 amended]
Bar on issuance of shares in certain cases: A listed entity is prohibited from issuing shares that may confer superior rights or inferior voting rights as to dividend vis-à-vis the rights on equity shares that are already listed . However, a listed entity having SR shares issued to its promoters or founders may issue SR shares to its SR shareholders only through a bonus, split or rights issue in accordance with the ICDR Regulations, 2018 and the Companies Act, 2013. [sub-regulation 3 of Regulation 41 substituted]
Treatment of SR shares and rights of SR shareholders: A new regulation 41 (A) has been inserted to provide that:
SR equity shares shall be treated like ordinary equity shares in terms of voting rights, that is, each SR share shall have only one vote for the following circumstances – appointment/removal of independent directors/ auditor; where a promoter is willingly transferring control to another entity; related party transactions involving an SR shareholder; voluntary winding up of the listed entity; changes to its AoA or MoA except any change affecting the SR share; initiation of a voluntary resolution process under the IBC, utilization of funds for purposes other than business; substantial value transaction based on materiality threshold; and passing of special resolution in respect of delisting or buyback of shares.
SR shares shall be converted to equity shares having voting rights at par with ordinary shares on the fifth anniversary of the listing of ordinary shares of the listed entity. Conversion prior to this period is also permitted at the option of the SR shareholder. SR shares may be valid for an additional period 5 years if a resolution to that effect is passed, where SR shareholders have not been permitted to vote.
SR shares will be compulsory converted to equity shares having voting rights at par with ordinary shares in the event of the demise of the promoter/founder holding such shares, the resignation of the SR shareholder from an executive position in the listed entity; merger/acquisition of the listed entity having SR shareholder(s) where the control ceases to vest in the SR shareholder(s) and sale of SR shares by an SR shareholder who continues to hold such shares after the lock-in period but prior to the lapse of validity of such SR shares.
Amendment to the SEBI Delisting Regulations 2009 and Buy-back Regulations 2018 : Regulation 3 of each of these Regulations pertaining to Applicability has been amended to clarify that the term “shares” shall include equity shares having superior voting rights.
By ensuring that the conversion of SR shares into ordinary shares is exempt from the obligation to trigger an open offer, even if prescribed thresholds are met, the amendment to the Takeover Regulations is in line with the market expectation and in the interest of express regulatory clarity. The amending definition of “shares” in the Delisting and Buy-Back of Securities Regulations to include equity shares having superior voting rights is again in line with market expectation and in the interest of regulatory clarity.
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
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