KS Badri Narayanan Amidst the Larsen & Toubro-Mindtree tussle, market regulator SEBI on March 20 came out with a consultation paper on differential voting rights instruments, even proposing a share with superior voting rights.

The paper addressed the norms for DVR issues under two categories — listed and unlisted entities.

The aim is to facilitate companies with high leverage or asset-light models raise equity without dilution of promoter control and serve as defence mechanism against any hostile takeover bid. The broad idea behind allowing shares with differential voting rights is that promoters/ founders can maintain control as they would hold shares with superior voting rights (SR).

In India, currently only DVR shares with inferior voting rights are permitted by SEBI. Four companies — Tata Motors, Jain Irrigation, Future Retail and Gujarat NRE Coke — have DVR shares listed on the bourses.

Norms for DVRs

Investors participating in the shares with lower or fractional voting rights (FR) get the opportunity to participate in the growth of the company through higher dividends, besides gains in case of a sunset clause, even though they have lower voting rights. Companies whose equities are already listed for at least one year, can be allowed to issue FR shares by way of rights, bonus issues and through follow-on public offers, as per the suggestion.

The FR shares should not exceed a ratio of 1:10, i.e., one vote as applicable to one ordinary equity share, would be voting entitlement on 10 FR shares. The ratio can be in full numbers from 1:2 to 1:10.

Superior voting rights shares can be issued only to the promoters of a company by an unlisted company.

An unlisted company where the promoters hold SR shares should be permitted to do an IPO of only ordinary equity shares, provided the SR shares are held by the promoters for more than one year prior to the filing of the draft offer document with SEBI, the consultation paper mooted.

A company should be permitted to issue any number of SR shares prior to an IPO, subject to provisions of the Companies Act 2013, it added.

The SR shares should be of a maximum ratio of 10:1, i.e., 10 votes for every SR share held. The ratio can be in whole numbers from 2:1 to 10:1. A ratio once adopted by a company should remain valid for any subsequent issuances of SR shares, the paper said.

Creation of any encumbrance over SR shares including pledge, lien, negative lien, non-disposal undertaking, etc, shall not be permitted. In other words, no third-party interest may be created over the SR shares, it further said.

Seeks comments by April 20

SEBI seeks stakeholder comments on the paper by April 20.

The move would help promoters/founders ward off any threat and give them a free hand in strategic decision-making. But then it would be difficult to check corporate governance if promoters/founders have disproportionate rights in running the company.

To check any irregularities in corporate governance and diversion of funds, SEBI could perhaps consider asking the companies to appoint more independent directors and a third-party auditor. Also, FR or ordinary shares should have rights like preference shareholders — if the company enters bankruptcy, these shareholders should have the first right on company assets.

A platform can be given to common shareholders to air their grievances or suggestions in writing, which the board and the management should consider. The replies and action taken report to each queries or complaints should be reported to SEBI and the exchanges.

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