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SEBI’s Consultation Paper on the issuance of DVRs

Finsec Law Advisors

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Shares with differential voting rights (DVRs) are shares that give the holder differential rights as to voting (either more or less voting right) as against the ordinary shareholders of the company. The Companies Act, 2013, permits companies to issue shares with differential rights. However, in 2009 the Securities and Exchange Board of India (SEBI) barred issuance of DVRs with superior voting rights (SR Shares). Presently, the issuance of shares with inferior/fractional voting rights (FR Shares) is permitted under the Indian regulatory regime. DVRs with FR Rights are suitable for investors who are keen on higher economic interest and are satisfied with inferior voting rights. FR Shares generally offer higher dividends compared to ordinary equity shares of a company. However, the popularity of DVRs has not picked up in India. DVRs are traded at a discount and they are less liquid compared to other securities. Till date, only 5 companies have issued DVRs in India, including Tata Motors and Stampede Capital Ltd.

In 2018, SEBI constituted a group comprising of members of the Primary Market Advisory Committee of SEBI (DVR Group) to study the introduction of shares with differential voting rights (DVRs). On March 20, 2019, the DVR Group submitted a consultation paper (Paper) with respect to the issuance of DVRs. The Paper inter alia highlights the pros and cons of issuing DVRs and has recommended the structure for regulating the issuance and listing of DVRs by companies. The recommendations in the Paper seem to have been prepared inter alia keeping in mind the needs of the founders of new age technology companies wherein promoters are seeking to raise capital and at the same time not lose control over their company.

However, there are several concerns with regard to the recommendations suggested in the Paper, some of which have been discussed hereinbelow. As per the Paper, listed companies are not permitted to issue SR Shares. Further, FR Shares can be issued only through limited means, namely, by a rights issues, a bonus issue and a follow on public offer. Options such as private placement have not been considered. SR Shares also have to be compulsorily listed on a recognised exchange even though they will form a separate class of shares.

With respect to unlisted companies whose shares are proposed to be listed, SR Shares can be issued to only the promoters of such companies. Further, pursuant to an initial public offer, such SR Shares will remain under a perpetual locked-in with the holder and she will not have the flexibility to transfer her DVRs to another person. According to the recommendations, in certain circumstances, the SR Shares will be treated at par with ordinary equity shares with respect to voting rights. The list of scenarios includes cases of change in control, which in a way defeats the purpose of issuing DVRs with SR Rights in the first place. Further, SR Shares are compulsorily convertible into ordinary equity shares within 5 years from the date of listing of the equity shares of the company, which may be too short a time frame to encourage new age technology companies to consider issuing SR Shares. The date of conversion can be delayed by way of special resolution in a general meeting where all members can vote on a one-share-one-vote basis.

In terms of voting rights, the Paper has also set a cap on the ratio between DVRs and ordinary equity shares. Further, a company can issue only one class of DVRs. Such restrictions may deprive the management of a company to adopt a convenient capital structure. On account of the aforesaid concerns, implementing the recommendations of the DVR Group may not be enough to incentivise companies to issue DVRs and such a law may turn out to be a dead letter law.