In a welcome move, SEBI vide PR No. 16/2019 released its decision with regard to ‘Framework for Issuance of Differential Voting Rights (DVR) Shares’.
Key proposals surround eligibility requirements. Per the dialogue, a Company having superior voting rights (“SR Shares”) would be permitted to do an Initial Public Offering (“IPO”) only of ordinary shares to be listed on the Main Board and subject to the fulfilment of eligibility requirements of the ICDR Regulations 2018.
Note: Regulation 41(3) of SEBI (LODR) Regulations 2015 provided that listed entity shall not issue shares in any manner which may confer on any person, superior rights so as to voting or dividend vis-à-vis the rights on equity shares that are already listed.
Result of Lobbying by Tech Companies for permitting Superior Voting Rights, the Regulator in a move to be inclusive and careful at the same time has extended this facility only to a Tech Company (per the definition in the Innovators Growth Platform).
Who can be issued SR shares?
Promoters and founders holding an executive position in the company and whose collective net worth does not exceed Rs. 500 Crores (excluding the interest in the issuer company). SR shares have to be issued pursuant to an authorization by a Special Resolution passed at a General Meeting of the Shareholders. SR Shares are prescribed to have maximum voting rights ratio of 10:1 whereas minimum being 2:1 compared to Ordinary shares. SRs are not transferrable among the promoters and no pledge/lien is allowed on them.
In order to be eligible for IPO, SR shares have to be held for a period of at least six months prior to filing of Red Herring Prospectus. And while the framework facilitates the listing of SR shares after the issuer makes a public issue. It places a lock-in until these are converted to ordinary shares (partially defeating its purpose).
Additionally, companies having SR shareholders would also be subject to enhanced corporate governance requiring firstly, that at least half of the board and two-third of the committee prescribed under LODR Regulations should comprise of independent directors and secondly, that the Audit Committee shall only comprise of Independent Directors.
Coat- Tail Provision – Post IPO, the SR Equity shares would be treated as Ordinary shares in terms of voting rights (i.e. one share, one vote) in circumstances such as Appointment/ removal of independent directors and/or auditor, where promoter is willingly transferring control to another entity, Related party transactions involving SR Shareholders and voluntary winding up of the company.
With regard to Fractional Rights Shares, the Board has opined to disallow its issue by existing listed companies. As a precaution, however, it noted that the need for allowing the issue of fractional rights shares by listed companies may however be reviewed after gaining enough experience with the use of SR shares.
NASSCOM suggested that Companies with SR Shares and/or FR shares who are otherwise eligible to list on the IGP should be explicitly allowed to list and issue pubic offer on the IGP. The IGP should become an attractive platform for technology-led start-ups including those having DVR shares.