‘Superior voting rights’ share norms to be diluted

Our Bureau Mumbai | Updated on July 01, 2021

SEBI consultation paper suggests easing of lock-in, net worth criteria

The Securities and Exchange Board of India (SEBI) has proposed to relax norms related to shares with differential voting rights in a bid to encourage start-up founders to list their business.

Under the existing norms, if a company issues Superior Voting Rights Shares (SR shares) to its promoters/founders, the company should be allowed to do an initial public offering of only ordinary shares for listing on the main board. In addition, the SR shares should have been held for a period of at least six months prior to the filing of the red herring prospectus.

SEBI has now deleted the requirement of holding SVR shares for a period of 6 months. “SEBI has received feedback from market participants that requirement is onerous which delays such issuer companies from raising funds from capital market,” the market regulator said in a consultation paper.

To help founders hold control

One of the reasons for introduction of SVR shares was to encourage start-up promoters who have an executive position in the company to retain certain amount of control for a limited period. Promoters of new age tech companies may have the necessary vision and skills to take the company forward, however, such individuals may lack the ability to infuse capital. Thus, they undergo significant shareholding dilution in order to raise capital at early stages. The SR shares help them to keep control of the company even as they raise funds through dilution of stake.

Under existing rules, the SR shareholder should not be part of the promoter group whose collective net worth is more than ₹500 crore. “SEBI has received feedback from market participants on the current requirement that, an SR shareholder shall not be part of promoter group whose collective net worth is more than ₹500 crore, is too onerous to comply and is keeping prospective SR shareholders away from utilising the SR shares framework,” the paper said.

Collective net worth

The definition of promoter and promoter group under the ICDR Regulations, is very broad and can include a large set of relatives/entities. Therefore, the investments/net worth of such relatives/entities would also be considered for determining the collective net worth.

Further, there could be multiple founders and the set of promoter group may become very large, thereby complicating the matter. Primary Market Advisory Committee (PMAC) deliberated the matter and considered mandating net-worth requirement of SR shareholder on an individual basis. The threshold for such net-worth requirement can also be enhanced. PMAC also considered excluding proceeds of sale of shares of the issuer company by an SR shareholder for the purpose of determining net-worth.

“SEBI has been quite proactive in taking feedback and implementing solutions. Holding period and net worth criteria could often be deal breakers for implementing SR shares structure. SEBI has identified key issues, and if implemented in the manner indicated, these changes will provide better ability and incentive to promoters to use this tool,” said Vishal Yaduvanshi, Partner, IndusLaw. “However, there could have been discussion on other similar concerns. For instance, the need for condition on maximum ratio of voting rights, when there is already a cap of 74 per cent on SRs in aggregate,” he added.

Published on July 01, 2021

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