Analysis of SEBI’s DVR Framework and Addressing Concerns – CorpLexia

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Aug 16, 2019
Date of Decision
Subject matter
Type of Work
Legislative Exploration
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A shareholder derives his power of voting in a company from Section 47 of the Companies Act 2013. With a general right to vote on every resolution, shareholders exert their ownership through voting on key corporate issues at the annual general meeting. These issues involve the appointment of the board of directors, issuing of securities etc. Certain restrictions can be placed on the voting rights of a shareholder by the articles of association of a company but generally, the shareholders have one vote per share in accordance with the principle of corporate governance.

With the growth and increase in the scale of operation, a company needs more capital. Debt not always being financially viable, a company may issue additional shares. With normal voting right shares, this issue results in the dilution of control for promoters or founders. Differential Voting Rights (DVRs) were brought in to help these promoters and founders who are instrumental in the genesis of the company to retain the value of their shares and ownership over the company. DVRs deviate from the common rule of one share-one vote and allow shares with either superior voting rights or fractional voting rights.[1]

[Arpit Saini is a student of BBA LL.B (Hons.) at the National Law University, Jodhpur]

The Need for DVRs

DVR shares which provide superior voting rights satisfy the capital requirements of the company while retaining the control with management even after an increased number of shareholders. The creation of a hierarchy with respect to the voting powers positively affects the structuring of the company and prohibits the harmful impact in the skeleton of policies, rules and regulations which a company decides for its functioning which may have occurred due to enlargement of the membership in case of ordinary voting rights. The DVRs serve as a mechanism to prevent hostile takeovers and related threats since the administration and control of the company is in safe hands.[2]

On the other hand, DVR shares with fractional voting rights may serve as an ideal investment strategy for those investors who would prefer to earn a higher dividend and are generally not concerned with exercising control over the company.

Hostile Takeovers

A hostile takeover refers to the acquisition of one company by another accomplished by directly approaching the company’s shareholders or replacing the management by force. The key characteristic is that the target company’s management is generally in opposition to such a takeover. A hostile takeover has the potential to upset the normal functioning of the company. It poses a threat not only to the shareholders but also the management and thus, there is a need to regulate market control. Recently after gaining a controlling interest in Mindtree Ltd by raising stake to 60%, Larsen and Toubro Ltd (L&T) successfully concluded India’s first hostile takeover in the IT sector. L&T bought the stake it targeted to acquire as large investors rushed to sell their holdings in an open offer.[3]

DVRs render an attractive proposition for promoters to ward off such takeovers as a major proportion of voting rights can remain firmly in the hands of the promoter group. However, in India only a few companies such as Tata Motors, Pantaloon Retails and Jain Irrigation have issued DVRs with fractional voting rights of 1/10th of the ordinary shares to public investors and DVRs have not yet been an attractive method of raising capital in India. The underlying reason has been the stringent regulations regarding these shares since the authorities have been wary of the fact that using DVRs regulators can dilute the way in which minority shareholders can get their voice heard which is bad in the long run along with a casual approach to the DVR framework of the past.[4]

Legal Framework and Historical Background

SEBI had initially prohibited the issue of superior voting rights by the listed companies in 2009 apprehending the possible misuse of “superior voting rights” in detriment to shareholders. The revamped Companies Act of 2013, however, allowed a limited-liability company to issue equity share capital under Section 43(a)(ii) with differential rights on voting, or dividends, or otherwise. Such issue was restrained by Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014 which prescribed certain conditions to be fulfilled by a company to issue DVRs such as the requirement of authorization from the articles of association of a company and the necessity of having a consistent track record of distributable profits for the preceding three years. Regulation 41(3) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 officially reiterated that listed entities shall not issue shares which confer superior rights as to voting or dividend on any person. Accordingly, the regulatory framework with respect to DVRs in India has been very restrictive for listed companies as it did not permit DVRs with higher or superior voting rights and DVRs with lower voting rights were permitted subject to certain conditions.

SEBI’s Consultation Paper

Recently, SEBI had opined that India is experiencing a high growth phase which requires companies to raise capital to sustain their growth whilst maintaining control. Companies, especially new technology firms, with high leverage or asset-light models prefer equity for meeting their capital requirements since there is little or no need for debt financing. Along with it, the recent chain of events including the Mindtree’s Hostile Takeover has emphasized the need of greater control for promoters who initiate start-ups.

Looking at DVRs as a viable instrument for meeting these needs simultaneously, SEBI proposed a framework of dual-class share with superior voting rights. The structure is already common at the global platform with companies such as Alibaba, Snapchat and Facebook issuing dual-class shares.

SEBI has not completely opened the floodgates for DVRs keeping in mind that it has to protect the interests of minority shareholders and prevent misuse of the issue of these shares. Thus, certain provisions of the framework are aimed at safeguarding the interests of minority shareholders once the company becomes public. They include restricting the framework to only unlisted companies and allowing only those technology companies to come out with an IPO in which the worth of the promoter group holding SR does not exceed Rs 500 crore. The IPO has to comprise of only ordinary shares and further issue of SR shares post listing is not permitted in any form. SEBI has also aimed certain provisions to ensure that these shares are used for the limited purpose of raising capital without losing out on the majority voting power. Therefore, the SR shares issued will have a bar on pledging or creating third-party interest and these shares are to be treated at par with the ordinary equity shares in every respect except voting on resolutions. The maximum voting power on SR shares is proposed 10 votes for every SR share held. The SR shares will also have a “sunset clause” wherein they will convert into ordinary shares after five years of issue. The provision looks to provide significant time to companies for growth in terms of operations, profitability, best serving the investors and ensuring stability in management. The promoters can, however, undertake an accelerated conversion of their SR shares into ordinary equity shares or extend it for another five years through a resolution depending upon the existing condition of the company. On the other hand, FR shares can be issued by any company listed for more than a year by way of a rights issue, bonus issue or a follow-on public offering or FPO. These shares will have lower voting rights but higher dividends.[5]

Concerns Regarding the New Framework

The framework developed by SEBI is welcome considering the intent behind SEBI’s consultation paper to incentivize listing of companies on Indian exchanges. The conditions for listing on an Indian exchange are particularly onerous for technology-led asset-light companies where business models may not focus on initial profitability and where debt may not be an appropriate source of capital.

The success of the framework is, however, dependent on the market. DVRs will have limited impact unless promoters have the commercial bargaining power to raise funds while holding superior voting rights. It is also necessary to be cautiously optimistic regarding the ability of DVRs as a tool for start-ups. The ability to attract a greater number and quality of listings list in India largely depends on conditions pertaining to listing and appetite of investors and there is no certainty of a sudden flow of listings.[6]

At the same time, concerns have also been flagged that superior voting right shares can adversely impact the minority shareholders’ interests and give predatory powers to promoters and powerful industrialists investing in start-ups as individuals. The proposal can also create a major disruption on the corporate governance front where equal voting rights are accepted as the norm. Corporate governance advocates argue that shareholders must have the power to speak and effect changes if necessary. With India making notable strides to improve its corporate governance practices, they state that it’s a step in the wrong direction.[7]

With all these issues converging, SEBI as a regulator has the responsibility to concomitantly balance the interests of minority shareholders and new technology firms.


[1] Satya Sontanam, ‘All you need to know about…shares with superior voting rights’ (The Hindu Business Line, July 01 2019).

[2] Tanushree Pande, ‘Issuance of shares with differential voting rights’ (Lakshmikumaran & Sridharan Attorneys May 06 2019).

[3] Anirudh Laskar ‘With 60% stake, L&T completes its hostile takeover of Mindtree’ (Live Mint, June 27 2019).

[4] L. Badri Narayanan, Pooja Vijayvargiya ‘A new class of shares that will spur entrepreneurship’ (Live Mint, June 19 2019).

[5] Samie Modak ‘Sebi mulls dual-class structure to prevent hostile takeovers’ (, March 20 2019).

[6] Devika Agarwal ‘Nasscom’s Submission on SEBI’s Consultation Paper on Shares with Differential Voting Rights’ (Nasscom Community, July 1 2019).

[7] ‘Experts flag ‘predatory’ powers to some at cost of minority investors’ (Economic Times, May 05 2019).

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