Slate

All you need to know about...shares with superior voting rights

Satya Sontanam SLate | Updated on July 01, 2019 Published on July 01, 2019

After much debate on enabling shares with differential voting rights, the Securities and Exchange Board of India (SEBI) recently allowed listing of companies with shares of superior voting rights on Indian exchanges. This had start-up founders cheering.

What is it?

Promoters or founders who are instrumental in starting up a company often lose control of the firm when they dilute their stakes to raise multiple rounds of funding. Differential Voting Rights (DVRs), which do not follow the common rule of one share-one vote, enable promoters to retain control over the company even after many new investors come in, by allowing shares with superior voting rights or lower or fractional voting rights to public investors.

In the past, companies such as Tata Motors, Pantaloon Retails and Jain Irrigation issued DVRs having fractional voting rights of 1/10th of the ordinary shares to public investors. These shares offer higher dividend compared to the ordinary shares in lieu of the voting rights taken away.

But the issuance of DVRs with superior voting rights was prohibited by the SEBI. This was to prevent the possible misuse of power by the promoters detrimental to the interests of small shareholders.

But countries such as the US, Canada, Hong Kong and Singapore allowed issuance of shares with superior rights subject to increased monitoring on corporate governance and disclosure requirements.

For instance the Facebook founders retained the control of the entity by issuing two kinds of shares — Class A shares carrying one voting right (listed through the IPO and held by public shareholders) and Class B shares carrying 10 votes each (not listed, held by Mark Zuckerberg and affiliates).

Why is it important?

To make capital available to Indian start-ups and to encourage listing on the country’s exchanges, SEBI recently permitted Initial Public Offering (IPO) of unlisted companies with shares of superior rights.

However, considering possible corporate governance issues, it is to be allowed only for select companies which use intensive technology, information technology, intellectual property, data analytics, bio-technology or nano-technology.

The superior rights shares must be held only by promoters or founders with voting rights in the ratio of 2:1 (2 votes for one share) to 10:1 (10 votes for one share) compared to ordinary shares.

Post listing, the shares with superior rights will be treated at par with ordinary share. But, such shares cannot be listed and traded on the exchange platform until they are converted to an ordinary share. Superior rights shares get converted to ordinary shares after five years of listing of ordinary shares or the demise or resignation of the shareholder with superior rights.

Further, transfer of superior rights shares or creation of any encumbrance over such shares including pledge and lien will not be possible.

Besides such restrictions, there would be enhanced corporate governance compliances for such companies at least half of their board and the whole of the audit committee must comprise only independent directors.

Why should I care?

If you are a small retail investor who wants to enjoy the financial benefits of companies’ success but are not interested in the voting powers, SEBI’s approval to list unlisted companies with superior rights may have just expanded your investment universe.

That said, you have to be cautious as liquidity could be an issue on such shares till there’s an increased awareness on such issues.

Bottomline

Promoters in India now get to be the first among equals.

Published on July 01, 2019
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