The Capital Market Regulator, SEBI, at its Board meeting held on June 29, 2019, came out with one of its much anticipated and reformery move by announcing and approving the framework relating to Issuance and listing of Differential Voting Rights (DVR) Shares.

Currently, 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, the Apex Capital Market Regulator, SEBI, at the aforesaid meeting, 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. SEBI, at the above mentioned BM, approved the proposal for IPO of only Ordinary Equity Shares by companies having SR shares. This proposal, to begin with, is restricted only to the new tech companies.

Such framework accordingly required amendments in various SEBI Regulations, few of which have already been promulgated but the amendment in SEBI (ICDR) Regulations is yet awaited. 

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:

1. 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 NR 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 RPT 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

2. 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.”

3. 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.”

4. 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:   

1. 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’, whichhas 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.
2. 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 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

3. 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.

CP Remarks:

The concept of shares with superior voting rights has been introduced by SEBI in order to boost and encourage the listing of Start-ups. As is being observed, these tech companies require continuous funding as they involve extensive use of technology. With the lack of funding in hand and unwillingness of creditors to lend money, many of them failed and could not see the light of the day. 

With these amendments, the new tech companies seeking funding for their operations may issue shares that will provide them with appropriate funds without the dilution of their shares towards the public. It would give the Indian promoters and their enterprises an option to raise capital without diluting control over the enterprise.

SEBI, vide these amendments, has on one hand granted superior voting rights to promoters and executives and on the other hand, to safeguard the interest of minority shareholders and other investors, have tightened the provisions of Corporate Governance. Thus, thereby the keeping checks and balance between shareholding vis a vis the governance norms.