SEBI Prescribes Framework for DVRs by Tech Companies

By a Press Release dated June 27, 2019, SEBI approved a framework for issuance of shares with differential voting rights (‘DVRs’) by tech companies (as defined with respect to the Innovators Growth Platform), subject to various conditions including additional corporate governance standards. The key proposals approved are set out below.

i.       Issuance of shares: A company whose shares are proposed to be listed and would have superior voting rights shares (‘SR shares’) would be permitted to make an initial public offering (‘IPO’) of only ordinary shares to be listed on the main board subject to compliance with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘SEBI ICDR Regulations’) and the following conditions: (a) the issuer is a tech company,[1] (b) the holders of SR shares shall not be part of the promoter group whose collective net-worth is more than Rs. 500 crores (approx. USD 73 million),[2] (c) SR shares has been issued only to the promoters/founders holding executive position(s) in the company, (d) issuance of SR shares have been duly authorised by a special resolution of the shareholders, (e) SR shares have been held for at least six months prior to filing of the red herring prospectus, and (f) SR shares have voting rights in the ratio of 2:1 to 10:1 compared to ordinary shares.

ii.      Listing and Lock-in: SR shares should be listed on the stock exchanges after the IPO by the issuer company, and must be locked-in until their conversion to ordinary shares (transfer inter-se promoters, and pledge/lien on SR shares not to be permitted).

iii.     Rights: SR shares should be treated at par with ordinary equity shares including in respect of dividend issuance, except as regards voting on resolutions. The total voting rights of SR shareholders should not exceed 74% post listing.

iv.      Enhanced Corporate Governance: Companies with holders of SR shares will be subject to enhanced corporate governance wherein half of the board and two-third of committees (excluding the audit committee) should comprise of independent directors[3] while the audit committee must comprise of only independent directors.

v.       Coat-tail provisions: Post-IPO, in relation to 10 specified items, the SR shares would be treated as ordinary equity shares in terms of voting rights (i.e., one SR share shall have only one vote). Such items include appointment or removal of independent directors and/or auditors, related party transactions in terms of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI Listing Regulations’) involving holders of SR shares, voluntary winding up of the company.

vi.     Sunset Clauses: SR shares would be converted into ordinary shares either with the passage of time i.e., at the completion of the fifth anniversary of listing[4] or would be event based i.e., on the occurrence of certain events such as demise or resignation of shareholders of SR shares, merger or acquisition, etc.

vii.    Fractional Rights Shares: The issuance of fractional rights shares by existing listed companies must not be allowed. The need for permitting the issuance of fractional rights shares may be reviewed after gaining enough experience with the use of SR shares.

SEBI has amended the SEBI Listing Regulations and the SEBI ICDR Regulations on July 29, 2019 to notify some of the above noted provisions.

[1] A company, 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.
[2] It may be noted that while determining the collective net worth, the investment of the SR shareholders in the issuer company would not be considered.
[3] In accordance with the SEBI Listing Regulations.
[4] The validity of the SR shares can be extended by five years through a resolution in which the SR shareholders would not be permitted to vote on such resolution.

Published In:Inter Alia - Quarterly Edition - July 2019 [ English
Date: July 31, 2019