Sebi issues consultation paper on differential voting rights

New Delhi: Markets regulator Sebi on Wednesday came out with a consultation paper on differential voting rights.

The paper has been issued pursuant to a report submitted by a Sebi-constituted group on Differential Voting Rights (DVR).

"For companies with high leverage or asset light models may prefer equity over debt capital. Raising equity on a periodic basis leads to dilution of founder/ promoter stake, which can be effectively addressed through use of DVRs as a mode of capital raising," it said.

According to the report, the DVR shares can be issued broadly under two categories — one that would cover issuance by listed companies and the other by unlisted entities.

Generally, DVR shares have rights disproportionate to their economic ownership.

In India, DVR shares with inferior voting rights (Fractional Rights) are permitted by the Securities and Exchange Board of India. The report has suggested having DVR shares with Superior Voting Rights (SR) along with FR.

For companies whose equities are already listed for at least one year, they can be allowed to issue FR shares by way of rights, bonus issues and through follow-on public offer of FR shares, as per the report.

"SR Shares can be issued only to the promoters of a company by an unlisted company.

"An unlisted company where the promoters hold SR Shares shall be permitted to do an Initial Public Offer of only ordinary equity shares provided the SR Shares are held by the promoters for more than one year prior to filing of the draft offer document with Sebi," the report said.

Recommendations of the report is part of the consultation paper.

The Sebi noted that in promoter/ founder-led companies where promoters/ founders are instrumental in the success of the companies, DVR structures enable them to retain decision-making powers.

Such structures will also provide them with rights vis-a-vis other shareholders either through retaining shares with SR or issuance of shares with lower or FR to public investors.

Stakeholders can submit their comments on the paper on or before April 20.

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