Vide a press release No. 16/2019 dated June 27th 2019 ("Press Release") the Securities and Exchange Board of India ("SEBI") has on its board meeting held on 27th June 2019 permitted the listing of companies with superior voting rights ("SRs").
The objective of the SRs is to vest certain shareholders (usually the promoters of the concerned company) with superior rights as to voting so as to enable them to retain control of the concerned company. Under the previous SEBI regulations all shares with SRs would convert into normal shares upon listing of the shares.
The framework proposed by the Press Release is as follows:
(1) Eligibility: A company having SR shares would be permitted to do an initial public offering (IPO) of only ordinary shares to be listed on the Main Board, subject to fulfilment of eligibility requirements of the SEBI(Issue of Capital and Disclosure Requirements) Regulations, 2018and the following conditions:
- The issuer company is a tech company (as per the definition in Innovators Growth Platform) i.e. intensive in the use of technology, information technology, intellectual property, data analytics, bio- technology or nano-technology to provide products, services or business platforms with substantial value addition.
- The SR shareholder should be a part of the promoter group whose collective net worth does not exceed Rs. 500 Crores. While determining the collective net worth, the investment of SR shareholders in the shares of the issuer company shall not be considered.
- The SR shares have been issued only to the promoters/ founders who hold an
executive position in the company.
- The issue of these SR shares has been authorized by a special resolution passed at a general meeting of the shareholders
- SR shares have been held for a period of at least 6 months prior to the filing of Red Herring Prospectus (RHP)
- SR shares have voting rights in the ratio of minimum 2:1 to maximum 10:1 compared to ordinary shares.
(2) Listing and Lock-in:
The SR shares shall also be listed on Stock Exchanges after the issuer company makes a public issue. However, SR shares shall be under lock-in after the IPO until their conversion to ordinary shares. The transfer of SR shares among promoters shall not be permitted. No pledge/ lien shall be allowed on SR shares.
(3) Rights of SR shares:
The SR shares shall be treated at par with the ordinary equity shares in every respect, including dividends, except in the case of voting on resolutions. The total voting rights of SR shareholders (including ordinary shares), post listing, shall not exceed 74%.
(4) Enhanced corporate governance: Companies having SR shareholders shall be
subject to enhanced corporate governance as follows:
i) At least ½ of the Board and 2/3rd of the Committees (excluding Audit Committee) as prescribed under the SEBI(LODR) Regulations, 2015 shall comprise of Independent Directors
ii) Audit Committee shall comprise of only Independent Directors.
(5) Coat-tail Provisions:
Post -IPO, the SR Equity Shares shall be treated as ordinary equity shares in terms of voting rights (i.e. one SR share shall have only one vote) in the following circumstances:
i) Appointment or removal of independent directors and/or auditor;
ii) In case where promoter is willingly transferring control to another entity
iii) Related Party Transactions in terms of SEBI(LODR) Regulations involving SR shareholder; and
iv) Voluntary winding up of the company;
Comment: The listing of SR Shares is a welcome steps particularly for technology companies and start-ups seeking to retain control with the founders. However it is interesting to note that while private limited companies are permitted to have shares with differential rights as to voting, dividend and otherwise only shares with superior voting rights have been permitted to list under the framework proposed by the Press Release.
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