Listing of Differential Voting Rights (DVR) Shares.- Superior Voting Rights (SRs) by tech companies

Unlisted companies are permitted to issue DVRs subject to conditions and restrictions provided in Companies Act, 2013.

However, SEBI Regulations prohibit issuance of shares with superior voting rights by listed companies.  The present regulatory regime dealing with issuance of DVR shares include the following:

  • SEBI Listing Regulations, 2015:Reg 41(3) prohibits a listed company from issuance of shares which may confer on any person superior rights as to voting or dividend vis-à-vis the rights of equity shares that are already listed.
  • SEBI (ICDR) Regulations, 2018:It mandates a requisite that the shares issued in an issue are pari- passu with the existing shares in all respects including dividend.
  • Companies Act, 2013:The section 43(a)(ii) of Companies Act, 2013 along with Rule 4(1)(d) of Companies (Share Capital and Debenture) Rules, 2014, companies are permissible to issue shares with differential voting rights (fractional rights) after fulfilling the condition of “

having consistent track record of distributable profits for the last 3 years”.

Now,  SEBI, permitted the issuance of shares with Superior Voting Rights (SRs) by tech companies which meet up the eligibility criteria as per the definition in Innovators Growth Platform (as prescribed in Chapter X of SEBI ICDR Regulations, 2018), only to the promoters/ founders who hold an executive position in such companies

Innovators Growth Platform- Sebi has also renamed the institutional trading platform (ITP) as innovator growth platform (IGP)

AMENDMENTS

SEBI vide its notification in official gazette dated July 29, 2019, amended various Regulations, vis-à-vis, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI (Buy-Back of Securities) Regulations, 2018, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and SEBI (Delisting of Equity Shares) Regulations, 2009, to deal with the provisions governing shares with Superior Voting Rights.

The brief of amendments are as follows:

I. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Regulation Pertaining to- where the listed company has outstanding SR equity shares Amendment Variance from the ordinary Equity Shares provisions
Newly inserted Reg 17(1)(d) Composition of Board of Directors Min. 1/2 of the board of directors shall comprise of independent directors (ID) If Chairperson is NED: Min.  1/3rd IDs

If Chairperson is ED/ related to promoters: Min.  1/2 IDs

Reg 18(1)(b) Composition of Audit Committee All members shall be independent directors 2/3rd of members shall be IDs.
Reg 19(1)(c) Composition of Nomination and Remuneration Committee 2/3rd of members shall be independent directors 1/2 of members shall be IDs.
Reg 20(2A) Composition of Stakeholder Relationship Committee 2/3rd of members shall be independent directors Min. 1  ID
Reg 21(2) Composition of Risk Management Committee 2/3rd of members shall be independent directors ID as member is not mandatory
Reg 41(3)- Substitued Further issuance of SR equity shares Any issuance of shares with either inferior or superior voting rights, by the companies already listed is restricted.
However, the listed entity having SR equity shares issued to its promoters/ founders, may issue SR equity shares to its SR shareholders only through a bonus, split or rights issue in accordance with the provisions of the SEBI ICDR, 2018 and the Companies Act, 2013.
Newly inserted Reg 41A Rights of SR shares:
The SR equity shares shall be treated as ordinary equity shares in terms of voting rights (i.e. One SR, One Vote) in the following circumstances:

*Appointment or removal of independent directors and/or auditor;

*Where promoter is willingly transferring control to another entity

*Related  Parties Transaction  in terms of SEBI(LODR) Regulations involving an SR shareholder

*Voluntary winding up of the listed entity;

*Changes to the Articles of Association or Memorandum of Association of the listed entity, except any changes affecting the SR equity shares;

*Initiation of a voluntary resolution plan under IBC;

*Utilization of funds for purposes other than business

*Substantial value transaction based on materiality threshold as prescribed under LODR;

*Passing of special resolution in respect of delisting or buy-back of shares;

*Other circumstances or subject matter as may be specified by SEBI from time to time.

Max. SR Shares The total voting rights of SR shareholders (including ordinary shares), post listing, shall not exceed 74%.
Sunset Clause Automatic Conversion of SR shares into ordinary shares:

On the 5th anniversary of listing of the ordinary shares of the listed entity;

Extension of validity: SR equity shares may be valid for upto additional 5 years, on passing of shareholders’ resolution, where the SR shareholders have not been permitted to vote.

Compulsory conversion of SR shares to into ordinary shares:

demise of the promoter(s) or founder holding such shares;

an SR shareholder resigning from the executive position in the listed entity;

merger or acquisition of the listed entity having SR shareholder/s, where the control would no longer remain with the SR shareholder/s;

the SR equity shares are sold by an SR shareholder who continues to hold such shares after the lock-in period but prior to the lapse of validity of such SR equity shares

II. SEBI (Buy-Back of Securities) Regulations, 2018;

Regulation Pertaining to- Amendment
Insertion of Explanation to Reg. 3 Applicability of Buy-Back Regulations the term “shares” shall include equity shares having superior voting rights.”

III. SEBI (Delisting of Equity Shares) Regulations, 2009

Regulation Pertaining to- Amendment
Insertion of Explanation to Reg. 3 Applicability of Delisting Regulations the term “shares” shall include equity shares having superior voting rights.”

IV. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

Regulation 28(3) & 31 of SEBI (SAST) Regulations, 2011, pertaining to the “Encumbrance” related provisions have been amended. While the definition of the term has been widened and additional disclosure requirements have also been promulgated for encumbrances. The amendments are as follows:

A. Revised scope of “Encumbrance”:Prior to the amendment, Regulation 28(3) defined the term Encumbrance to include ‘a pledge, lien or any such transaction, by whatever name called’, which has been substituted to include the following:

    • any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly;
    • pledge, lien, negative lien, non-disposal undertaking; or
    • any covenant, transaction, condition or arrangement in the nature of encumbrance, by whatever name called, whether executed directly or indirectly.

B. Additional Disclosure Requirement:In addition to the existing disclosure requirements under Regulation 31 of SEBI (SAST) Regulations, 2011 for every creation, release and invocation of encumbered shares, now following Disclosure is also needed to be made on yearly basis, by the promoters along with Persons Acting in Concert (PAC)

By To For When
Promoter along with PACs Stock Exchanges where shares of the Target Company are listed;

Audit Committee of the Target Company

In addition to the disclosures made during the FY under Reg31, declare that no other encumbrance has been made directly or indirectly Within seven working days from the end of each financial year

C. Relaxation from Open offer on conversion of SR shares into OR shares:Further, in view of the decisions taken at the BM, approving the framework for Issuance of DVR Shares, a new exemption has been inserted in Regulation 10, providing exemption to the transactions wherein there is no acquisition of control, however triggering the open offer obligation as per the threshold provided under Regulation 3(1) and Regulation 3(2) pursuant to the conversion of equity shares with superior voting rights into ordinary equity shares.

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