The Securities and Exchange Board of India (SEBI) has vide notification dated July 29, 2019 notified the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2019 [1] (‘Amendment Regulations’). The Amendment Regulations deal with issue of shares with differential voting rights.
SEBI had on March 20, 2019 come out with a consultation paper[2] on issuance of shares with Differential Voting Rights (DVRs) which was prepared by the Primary Market Advisory Committee of SEBI and a group known as the DVR Group. The report issued by the DVR Group covers two broad heads for issuance of DVRs viz;
- Issuance by companies whose equity shares are already listed on the stock exchanges; and
- Companies with equity shares not hitherto listed but proposed to be offered to the public.
The outcome of the SEBI board meeting held on June 27, 2019[3] had prescribed certain conditions to be incorporated in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR Regulations’) to allow issuer companies to do an Initial Public Offer (IPO) of ordinary shares. The parameters discussed in the SEBI Board Meeting have been incorporated in the Amendment Regulations.
Consequently, SEBI on July 29, 2019 amended the SEBI (Listing Obligations and Disclosure Requirements), 2015 [4] (‘Listing Regulations’) to include compliances in relation to corporate governance provisions for listed entities which have issued shares with Superior Rights (SRs). The amendment inter alia included changes in the composition of the Board of Directors (Board) and Committees of the Board and the prohibition w.r.t. issue of shares with SR was replaced with the following:
- a 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) Regulations, 2018.
The ICDR Regulations is now amended to bring it in line with the corresponding provisions of the Listing Regulations and the outcome of the Board Meeting held on June 27, 2019.
The Article discusses in brief the amendments made by the Amendment Regulations.
A new clause has been inserted in regulation 2 to define SR equity shares as follows:
“(eeea) “SR equity shares” means the equity shares of an issuer having superior voting rights compared to all other equity shares issued by that issuer.”
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Eligibility Criteria for IPO
Regulation 6 of the ICDR Regulations prescribes the eligibility criteria for an issuer for making an IPO on the main board. In case the issuer has issued SR equity shares to its promoters/ founders, the issuer shall be allowed to do an IPO of only ordinary shares subject to compliance of following conditions:
- The issuer shall be intensive in the use of
- technology;
- information technology;
- intellectual property;
- data analytics;
- biotechnology;
- nanotechnology;
to provide products, services, or business platforms with substantial value addition.
- The SR shareholder shall not be part of the promoter group whose collective net worth is more than rupees 500 crores.
- The SR shares must have been issued only to promoters/ founders who hold an executive position in the issuer company;
- A special resolution must be passed by the shareholders of the issuer company authorizing the issue of the SR equity shares. The notice calling such meeting shall specifically disclose the following:
- the size of issue of SR equity shares,
- ratio of voting rights of SR equity shares vis-à-vis the ordinary shares,
- rights as to differential dividends, if any
- sunset provisions, which provide for a time frame for the validity of such SR equity shares,
- matters in respect of which the SR equity shares would have the same voting right as that of the ordinary shares,
- The SR equity shares have been held for a period of at least 6 months prior to the filing of Red Herring Prospectus (RHP);
- The voting rights w.r.t. the SR equity shares shall be in the following ratio compared to ordinary shares, and shall such ratios shall be in whole numbers only
- Minimum 2:1 upto a maximum of 10:1
- The face value of the SR equity shares shall be same as that of the ordinary shares;
- There shall be only one class of SR equity shares of the issuer;
- Except for superior voting rights, the SR equity shares shall be equivalent to ordinary equity shares in all respects;
Promoters Contribution
As per Regulation 14 for IPO and Regulation 113 for Further Public Offer (FPO) of the ICDR Regulations, the promoter of the issuer company is required to hold at least twenty percent of the post issue capital (in case of IPO) or either to the extent of twenty per cent of the proposed issue size or to the extent of twenty per cent of the post-issue capital (in case of FPO).
Since the SR shares are issued only to promoters/ founders of the issuer company, the minimum promoters’ contribution is amended to include the equity shares with superior rights. Therefore the SR equity shares of promoters, if any, shall be eligible towards computation of minimum promoters’ contribution.
Lock-in of specified securities held by the promoters
In case of IPO and FPO, the minimum promoters’ contribution is required to be locked in for a period of three years and the excess contribution is required to be locked for a period of one year. However, the SR equity shares shall be under lock-in until conversion into equity shares having voting rights same as that of ordinary shares or shall be locked-in for a period specified in the Regulations subject to compliance with all other provisions.
Pledge & transferability of locked-in specified securities
Regulation 21 (in case of IPO) and Regulation 119 (in case of FPO) allows pledging by promoters of locked in securities as a collateral security but an exception has been carved out with respect to SR equity shares. The promoters are not allowed to pledge the locked-in SR equity shares as security for grant of loan.
The transferability of locked in SR equity shares has also been restricted from one promoter to another or any person in the promoter group or a new promoter.
Rights issue by an issuer
A new sub regulation has been inserted which restricts the promoters from renouncing their rights and provides that the SR equity shares received under the rights issue shall remain under lock-in until conversion into equity shares having same rights as that of ordinary equity shares.
Bonus issue by an issuer
In regulation 294 which provides for the restriction on the bonus issue a new sub regulation has been inserted to provide that in case an issuer has issued SR equity shares, any bonus issue on the SR equity shares shall carry the same ratio of voting rights compared to ordinary shares and the SR equity shares issued in a bonus issue shall also be converted to equity shares having voting rights same as that of ordinary equity shares along with existing SR equity shares.
Conclusion
The Amendment Regulations has amended the ICDR Regulations to include provisions for issuers who have already issued SR equity shares to its promoters/ founders and now planning to come up with an IPO or FPO. The discussion as done at the SEBI Board meeting has been incorporated in the Amendment Regulations. Certain amendments have also been made in the Schedules of the ICDR Regulations pertaining to disclosures in the due diligence certificates and offer documents. Similar amendments w.r.t. SR equity shares has also been made in the Listing Regulations.
[1] https://taxguru.in/sebi/course-gst-certified-practitioner-by-msme.html
[2] https://taxguru.in/sebi/consultation-paper-issuance-shares-differential-voting-rights-dvrs.html
[3] https://taxguru.in/sebi/framework-issuance-differential-voting-rights-dvr-shares.html
[4] https://taxguru.in/sebi/sebi-listing-obligations-disclosure-requirements-fourth-amendment-regulations-2019.html
Manoj Kumar Tiwari, Executive, Vinod Kothari & Company
corplaw@vinodkothari.com, manoj@vinodkothari.com
