A consultation paper on the issuance of DVR shares has been released by SEBI,
which will significantly change the transaction structure of the Indian market.
It deviates from the traditional one share one vote concept. Under the
proposed mechanism, companies already listed on the stock exchange may issue
'fractional right' (FR) shares for at least one year, while the shares will have
a ratio of not less than 1 vote for every 10 shares owned.
On the other hand, for companies wishing to list on a stock exchange, the
superior right (SR) shares will be reserved. For each share owned, these
shares will have a voting rights ratio of up to 10 votes for (10:1). Such shares
will have an initial five-year period after the IPO before reverting to ordinary
shares but could have been extended for an additional five years at least.
Differential voting rights are against principles of healthy corporate
governance because the Approved Structure does not allow for companies whose
equity shares are already listed on the stock exchanges to issue DVRs, even
though such a possibility was envisaged in the Consultation Paper. The Approved
Structure has narrowed the reach of DVR issuance to new listings created by
They did not allow any individual, including the promoters, to issue SRs by way
of rights or bonus issuance once their ordinary equity shares had been listed.
The approved system, however, has taken a different direction and has allowed
SRs to be released if the company chooses to issue incentives, share splits or
The Approved Structure specified that, after listing, SR shareholders' voting
rights would not surpass 74 percent (74 percent) of the total voting power,
compared to the 75 percent (75 percent) limit imposed in the Consultation
The Consultation Paper claimed that, after the IPO, the SR shares owned are to
remain under permanent lock-in. The Approved Structure notes, however, that the
SRs will be under lock-in until their conversion to ordinary shares after the
Markets need trust to run smoothly. Regulators and policy makers play a major
role in building this trust, but equally accountable are businesses that collect
capital and experts that advise them. DVRs impair the capacity of the board of
directors as fiduciaries to exercise their rights. There is a fundamental
disconnect between the attempts to empower independent directors and the demand
for DVRs, and before making reforms that diminish minority shareholder rights,
we should consider carefully.
Written By Vidushi Puri