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At its next board meeting to be held on June 27, SEBI is likely to come out with guidelines on differential voting rights (DVR), new norms for buyback and pledging of shares by promoters, sources close to the development told BusinessLine .
Apart from superior DVRs and buyback of shares by high debt companies, high financing deals involving loan against shares to promoters by mutual funds and NBFCs have been a contentious issue for the markets of late.
Generally, DVR shares carry rights disproportionate to their economic ownership. SEBI, through its guidelines, will attempt to clarify that DVRs have suitable safeguards and those holding these instruments will not be in a position to oppress minority shareholders. Currently, in India, DVR shares with inferior voting rights (fractional rights) are permitted by SEBI, but a report by an expert panel had suggested allowing DVR shares with superior voting rights (SR) along with FR. SEBI had put out the committee report for public comments in March.
Differential voting rights
DVR is a means by which company promoters can raise funds without diluting their control over their business. By issuing DVR shares with FR, they can raise capital without the risk of a hostile takeover. Similarly, by issuing DVR shares with superior voting rights, promoters can retain control even as the regular equity base expands.
In May, SEBI had floated another consultation paper on buyback policy, which stated that corporates having to buy back shares may now have to factor in consolidated group debt in their calculations. A controversy had erupted at the start of this year after Larsen and Toubro refused to showcase group-level debt in its numbers during the share buyback programme and kept out high debt numbers of a subsidiary company. SEBI had refused to accept company’s buyback but there were no specific rules regarding the same. The regulator will now fill the gap with fresh specific rules on buyback.
A SEBI panel is in favour of allowing a 2:1 debt-to-equity ratio for all companies on a consolidated basis at the group level for buyback of shares except for non-banking finance companies (NBFCs); their business model of borrowing requires higher leverage.
Share placement to NBFCs for a loan is considered as pledging and requires immediate public disclosure, which could alert investors of a debt scenario. But recently, it came to light that promoters who availed themselves of loan from debt funds by placement of shares did not make any public deceleration under the guise that ‘it was not a pledging arrangement via NBFC’.
SEBI will now come out with strict measures to state that any method of encumbrance of shares will be considered pledging and will require full disclosure by lender of money and borrowers, mainly promoters.
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