Crafted for long term passive investors interested in higher dividends & recurring income than in voting rights and management, Differential Voting Rights shares (‘DVRs’) prescriptions in India have now been liberalised. The Securities and Exchange Board of India (SEBI) has announced the framework for public issuance of ordinary shares by issuer companies having promoters holding Superior Voting Right (SVR) shares, dated September 28, 2021. This has come in the backdrop of the Primary Market Advisory Committee (PMAC) recommendations, and the self-reliant India trinity of ‘Ease of Business’ reforms, ‘Startup India’ and ‘Digital India’.

DVRs are issued by a company giving an equity shareholder differential voting rights, both superior and fractional rights, as against simple equity issues that operate on the principle of “one share, one vote”. The ratio of SVRs ought not to exceed ten votes per equity shares while the ratio for fractional voting rights is one vote for ten equity shares. One may note that DVRs trade like any other ordinary equity shares, but “at a discount”. Further, no bonus is issued herein unlike in the ordinary equity issues, and, is neither issued regularly nor in systematic intervals. Promoters find it apposite to raise capital via issuance of DVRs without diluting the control, thereby subjecting DVR issuance to the board prerogatives.

Internationally, where they are known as Dual Class Shares (‘DCS’), they have been used by companies like Michelin, Berkshire Hathaway, Alphabet (Google) and Facebook. In contrast, it had not appealed to the Indian corporate ecosystem until the pandemic.

Section 43(a) of the Companies Act, 2013, gives legal recognition to DVRs, providing for its issuance subject to conditions laid down under Companies (Share Capital & Debenture) Rules, (SCDR) 2014. The 1956 Companies Act did not confer any recognition or mention of DVR until the amendment in 2000. It was only in 2008 that DVRs were issued first by Tata Motors. Later, the suit was followed by Pantaloon Retails & Gujarat Coke Ltd (2009), Jain irrigation systems (2011), and Stampede Capital (2017). However, SEBI banned listed companies from issuing SVRs in 2009, citing potential exploitation of minority shareholders. Ironically, a decade later, SEBI announced a framework for adoption of DVRs on June 27, 2019, issuing a consultation paper on the same. The SCDR rules too have been amended earlier this year, relaxing the permitted percentage of DVRs from 26 per cent to 74 per cent of the total voting power.

The 2021 framework

It revokes the onerous mandates regarding public offering of the ordinary shares for listing prior to issuance of SVR shares, and lock-in period for holding the SVR shares six months prior to the filing of the red herring prospectus. It also enhances the threshold of ₹500 crore collective net worth of promoter group, thereby barring any shareholder from such promoter group to purchase the SVR shares. It further subjects DVRs to enhanced corporate governance measures and coat-tail provisions.

DVRs have been opposed on the grounds of corporate governance issues, management entrenchment and harm to shareholder interests. Therefore, a sunset clause mechanism to convert the DVRs into ordinary shares, has also been envisaged. Accordingly, the SVRs shall be treated as ordinary shares five years post listing in cases of time based conversions. On the other hand, event based unification shall be triggered on the occurrence of certain events like demise, resignation of a SVR holder, merger/acquisition where the control would no longer reside with the SVR holder etc. Such sunset rules are helpful to avoid undue control but they have their own drawbacks. The one-size-fits-all approach in setting the time frame of five years clearly fails to appreciate the unique attributes of any corporation, thereby compromising with the liberty of companies to tailor their internal affairs and governance practices. The five year limitation would inculcate a short term profit making attitude among the promoters in exercising their control to reap gains at the cost of ordinary shareholders. The framework, however, has made an attempt to address this issue by offering a one-time extension of five years via a resolution.

India is not the first country to move from outright ban to acceptance, in recent years. Singapore and Hong Kong amended their rules in 2018, allowing DCS to be listed. The move had initially come in the light of Alibaba listing in New York after being denied DCS listing at Hong Kong. The commercial hubspots have realised that DVRs aid unlock the value through public issues while maintaining stability and avoiding any hostile takeovers. SEBI too has now conceded to these advantages offered by DVRs to increase the likeability scale of Indian companies, especially in tech-firms undertaking cutting edge innovations. The start-up appeal although seems engaging, one must not forget the stellar reputation, Indian regime has when it comes to corporate governance.

(Shreyashi is a legal professional and Dr Panda is Assistant Professor of Finance at the National Institute of Securities Markets).

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