SUPERIOR VOTING RIGHTS EQUITY SHARES

[Mr. M. GOVINDARAJAN]

Introduction

The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2019, (‘Regulation’ for short) notified on 29.07.2019 introduced a new type of share called as ‘Special Voting Rights Equity Shares’ (‘SR shares’ for short).  For this purpose SEBI also made ‘the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2019 and notified which came into effect from 29.07.2019 and Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2019 (‘LODR Regulations’ for short).

SR Equity Shares

Regulation no 2(1)(eeea) defines the expression ‘SR Equity Shares’ as the equity shares of an issuer having superior voting rights compared to all other equity shares issued by that issuer.

Compliance for issue of SR shares

If an issuer has issued SR equity shares to its promoters/founders the said issuer shall be allowed to do an initial public offer of only ordinary shares for listing on the Main Board subject to the compliance with the following-

• the issuer shall be 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 shall  not be part of the promoter group whose collective net worth is more than ₹ 500 crore; (while determining the collective net worth, the investment of SR shareholder in the shares of the issuer company shall not be considered)
• the SR shares were issued only to the promoters/founders who hold an executive position in the issuer company;
• the issue of SR equity shares had been authorized by a special resolution passed at a general meeting of the shareholders of the issuer, where the notice calling for such general meeting specifically provide for 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 rights as that of ordinary shares;

• the SR equity shares have been held for a period of at least 6 months prior to the filing of the red herring prospectus;
• the SR equity shares shall have voting rights in the ratio of a minimum 2:1 up to a maximum of 10:1 compared to ordinary shares and such ratio shall be in whole numbers only;
• the SR equity shares shall have the same face value as the ordinary shares;
• the issuer shall only have one class of SR equity shares;
• the SR equity shares shall be equivalent to ordinary equity shares in all respects, excepting for having superior voting rights.

Minimum Promoters’ contribution

Regulation 14(2)(a) provides that the promoter shall contribute 20% either by way of equity shares, including SR equity shares if any, or by way of subscription to convertible debentures.

Lock in period

The SR equity shares shall be under lock-in until conversion into equity shares having voting right same as that of ordinary shares or shall be locked in for a period of 3 years from the date of commencement of production or date of allotment in the initial public offer whichever is later.

The SR equity shares shall be under lock-in until their conversion to equity shares having voting rights same as that of ordinary shares provided they are in compliance with the other provisions of these regulations.

Pledge

The SR equity shares may not be pledged as a collateral security for a loan granted by a scheduled commercial bank or a public financial institution or a systematically important non banking finance company or a housing finance company.

Transfer

The SR equity shares cannot be transferred to another person or any person of the promoter group or a new promoter like that of specified securities.

Renouncing rights

Where the issuer has issued SR equity shares to its promoters or founders, then such a SR shareholder shall not renounce their rights.  The SR shares receive in a rights issue shall remain under lock-in until conversion into equity shares having voting rights same as that of ordinary equity shares along with existing SR equity shares.

Computation of minimum promoters’ contribution

The SR equity shares of promoters, if any, shall be eligible towards computation of minimum promoters’ contribution.

Bonus shares

If an issuer has issued SR equity shares to its promoters or founders 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 into equity shares.

Due diligence

Schedule V to these regulations provides the format of due diligence to be given by the lead manager(s) along with the draft offer document or draft letter of offer.  The lead managers have to confirm, among the other things, that an undertaking from the issuer that at any given time, there shall be only one denomination for the equity shares of the issuer excluding SR equity shares where the issuer has outstanding SR equity shares.

Information on terms of issue

Clause 15(A) of Schedule VI to these regulations provides for the information given in respect of terms of issue.  In case of companies having SR equity shares a statement that the shares issue in the issue shall be pari passu with the existing shares (excluding SR equity shares) in all respects including dividends. 

In case of an issuer having SR equity shares the special rights of such SR shareholders shall be disclosed along with the circumstances in which the SR equity shares shall be treated as ordinary equity shares.

Exempt from making an open offer

SEBI made ‘the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2019 and notified which came into effect from 29.07.2019.  The amendment inserted a new clause 10(2A) to the regulations which provides that an increase in the voting rights of any shareholder beyond the threshold limit (25% or more of voting rights in the target company), without the acquisition of control, pursuance to the conversion of equity shares with superior voting rights into ordinary equity shares shall be exempted from the obligation to make an open offer.

Outstanding SR equity shares

Independent directors

LODR Regulation 17 provides for the composition of Board of Directors of the listed company.  Regulation 17(1)(d) provides that where the listed company has outstanding SR equity shares at least half of the Board of directors shall comprise of independent directors.

Audit Committee

In case of a listed entity having outstanding SR equity shares, the audit committee shall only comprise of the independent directors.

Nomination and Remuneration Committee

In case of a listed entity having outstanding SR equity shares, two thirds of the nomination and remuneration committee shall comprise of independent directors.

Stakeholders Relationship Committee

In case of a listed entity having outstanding SR equity shares, at least two thirds of the Stakeholders Relationship Committee shall comprise of independent directors.

Risk Management Committee

In case of a listed entity having outstanding SR equity shares, at least two thirds of the Stakeholders Risk Management Committee shall comprise of independent directors.

Rights to dividend

The listed entity shall not issue shares in any manner that may confer on any person superior or inferior rights as to dividend vis-à-vis the rights on equity shares that are already listed or inferior voting rights vis-à-vis the rights on equity shares that are already listed.  A listed entity having 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 o SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 and the Companies Act, 2013.

Status of SR equity shares

The SR equity shares shall be treated at par with the ordinary equity shares in every respect, including dividends, except in the case of voting on resolutions.

Extent of voting rights of SR equity shares

The total rights of the SR shareholders (including ordinary shares) in the issuer upon listing, pursuant to an initial public offer, shall not at any point of time exceed 74%.

SR equity shares – ordinary shares

The SR equity shares shall be treated as ordinary equity shares in terms of voting rights in the following circumstances-

• appointment or removal of independent directors and/or auditor;
• where a promoter is willingly transferring control to another entity;
• related party transactions in terms of these regulations involving an SR shareholder;
• voluntary winding up of the list entity;
• changes to the articles of association or memorandum of association of the listed entity, except any change affecting the SR equity shares;
• initiation of a voluntary resolution process under the Insolvency Code;
• utilization of funds for purposes other than business;
• substantial value transaction based on materiality threshold as specified under these regulations;
• passing of special resolution in respect of delisting or buy back of shares; and
• other circumstances or subject matter as may be specified by the Board from time to time.

Conversion

The SR equity shares shall be converted into equity shares having voting rights same as that of ordinary shares on the 5^th anniversary of listing of ordinary shares of the list entity.  The SR equity shares may be valid for up to an additional 5 years, after a resolution to that effect has been passed, where the SR shareholders have not been permitted to vote.  The SR equity shareholders may convert their SR equity shares into ordinary shares at any time prior to the period as specified above.

Compulsory conversion

The SR equity shares shall be compulsorily converted into equity shares having voting rights same as that of ordinary shares on the occurrence of any of the following events-

• demise of the promoter(s) or founders holding such shares;
• an SR shareholder resigns 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 SR shareholders;
• 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.

Discussions to this article

[Ganeshan Kalyani]

Nice write up Sir.