The Securities and Exchange Board of India (SEBI) recently issued a consultation paper seeking public comments on a proposed regulatory regime for issuance of equity shares with differential voting rights (DVRs) by listed and to-be-listed companies in India. Unlike conventional one share, one vote equity shares, DVRs allow promoters to have voting power that is disproportionate to their ownership interest, which enables growth companies to raise capital without promoters losing control, and insulating them from hostile takeovers.
SEBI is now seeking to re-examine the regulations applicable to DVR issuances by allowing superior voting right (SR) share issuances to promoters prior to the initial public offering (IPO) while permitting the issuance of fractional voting right (FR) shares within one year from the IPO.
DVR structures are common in the US, Canada and certain European countries, and have recently been introduced in Singapore and Hong Kong. In the US, Facebook, Alphabet, Snap and Alibaba went public with DVR structures, and it continues to be popular as seen from the recent listings by Lyft, Zoom and Pinterest. However, reservations are expressed against such structures (including the 2017 decision of two large index providers to partially or fully exclude such companies with DVR structures from their indices) given their potential negative impact on shareholder rights and corporate democracy. While such structures give promoters autonomy to take risks and implement their strategic vision without the pressure of investor scrutiny or intervention, they expose companies to mismanagement and self-dealing by promoters. Therefore, promoter control must be balanced against the need for investor protection.
Juhi Singh is a partner and Tarinee Sudan is an associate at S&R Associates, a law firm with offices in New Delhi and Mumbai.
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