August 14, 2019

SEBI Urges Finance Ministry To Relax Regulations For Firms Which Wish To Issue Shares With Differential Voting Rights

[ By Bobby Anthony ]


The Securities and Exchange Board of India (SEBI) has urged the union finance ministry to relax norms for technology companies which wish to issue shares with differential voting rights (DVRs).

Though SEBI had had announced a new framework for DVR issuances recently, some of the regulations it proposed would need amendments in laws like the Companies Act and the Securities Contract Rules.

According to present Securities Contract Rules, any company wishing to issue DVRs would need to have at least three years of profitability.

However, SEBI is of the view that this would be difficult to achieve for technology start-ups which typically don’t make any profit in the initial years.

Therefore, SEBI had recommended scrapping the profitability criteria for companies which wish to issue DVRs which are special shares with different voting rights or dividend rights compared to normal shares.

Such instruments are often awarded to founders of technology start-up companies to them in order to retain control of their companies while diluting equity to raise shares from private equity investors.

Under the present Companies Act, share capital and debenture rules say that the maximum amount of equity which can be issued through DVRs can only be 24% of the total number of shares issued. SEBI has urged the finance ministry to raise this to 74%.

Similarly, current rules under the Companies Act permit issuance of only superior right shares at a ratio of not more than 2:1. SEBI would like this to be eased to a 10:1 ratio.

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