Differential Voting Rights (DVRs) means shares granting the holder
differential voting rights (superior or inferior voting rights) as opposed to
the company's ordinary shareholders. The implementation of this system by
companies act of 2013 and SEBI regulations means that public money can now be
taped by the promoters/founders without fear of losing good corporate governance
control. This raises a question that why will an investor buy such shares which
has inferior decision-making powers.
The answer is that this scheme lets the
pool of investors which are only interested in getting the higher dividends
while lacks interest in possession of control over the company as differential
voting rights shares are relatively cheaper to buy and the investor enjoys a
similar dividend rates as the normal shares. All this also initiated a debate of
whether differential voting rights is against the principal of good corporate
governance which is based upon the three major pillars of Transparency in
, accountability towards the shareholders
and fairness in
For breaching the one share-one vote principle and destroying shareowner
democracy, differential voting rights have long been criticized. nonetheless,
commercially, one share-one vote comes with costs because it discourages
businessmen from taping public funds for concern of losing power. Countries like
Hong Kong and Singapore that until recently had skipped over on some premium
listings didn't permit differential voting rights, prompting them to re-examine
their listing rules.
Corporations like Alibaba, for instance, have opted to be
listed on the New York exchange, as opposed to the Hong Kong exchange ('HKEX')
and also the London exchange, because the latter two haven't allowed firms using
differential voting rights to be listed.
Since then, Hong Kong and Singapore
have amended their laws to produce for differential voting right and elaborate
checks and balances. In alternative jurisdictions, SEBI has had the advantage of
scrutiny numerous formats of differential voting rights and formulating a format
for our country.
As a consequence, SEBI ICDR rules currently permit associate
degree IPO-bound company to own "superior right equity shares" (SRES). i.e., to
list the standard shares, equity shares with superior voting rights relative to
any or all alternative equity shares issued by the Companies.
So as per my observations, since concept of differential voting rights itself is
not against the good corporate governance since it could be implemented along
with principles discussed above by enacting regulatory rules by SEBI and other
Articles / Blogs:
- Companies Act, 2013
- SEBI ICDR Regulations
- Dhania, G. (2019, September 04). Differential Voting Rights: Does The
Corporate Governance Mechanism Match Up? - Corporate/Commercial Law - India.
Retrieved January 30, 2021, https://www.mondaq.com/india/shareholders/842610/differential-voting-rights-does-the-corporate-governance-mechanism-match-up
- L. (2019, June 01). What are Differential Voting Rights? Retrieved
January 30, 2021, https://medium.com/@Lexstart_India/what-are-differential-voting-rights-4c27632959de#:~:text=Shares%20with%20Differential%20Voting%20Rights,Ordinary%20shareholders%20of%20the%20company.&text=The%20shares%20issued%20withDifferential%20Voting,DIFFERENTIAL
- Joseph, V. (2019, November 12). Introducing Differential Voting Rights -
Corporate/Commercial Law - India. Retrieved January 30, 2021, from https://www.mondaq.com/india/shareholders/860576/introducing-differential-voting-rights#:~:text=Introduction,part%20of%20its%20share%20capital.
- Goyal, D. (2019). Notified Sections of Companies (Amendment)) Act, 2020-
Analysis. Retrieved January 30, 2021, from https://taxguru.in/company-law/notified-sections-companies-amendment-act-2020-analysis.html
- Section 43(a)(ii), Companies Act, 2013