Author: Suman Sahani, Shri Ramswaroop Memorial University, Lucknow
Introduction
Introduction of Differential Voting Rights (DVR) shares in India was a radical change in the corporate governance regulations. DVR shares %UFFFD Born Out of the Companies
(Amendment) Act, 2000.The idea behind DVR shares was to provide companies a flexible tool to design their capital structure as well as the management control in the company. But the journey of DVR shares in India has been ridden with regulatory interventions and policy flipflops, reflecting the nuanced battle between empowering corporate management and protecting the rights of the minority shareholder.
A year later, Tata Motors pioneered the introduction of DVR shares which were later followed by other companies. However, the excitement surrounding DVRs fizzled out soon enough. The Securities and Exchange Board of India (SEBI) had in 2009 clamped a moratorium on any such issuance of shares with Superior Voting Right (SVR). The regulatory intervention followed apprehensions about misuse by powerful promoters with high voting control that subordinated the rights of minority investors, especially in family-owned businesses. SEBI intervened with the objective of safeguarding the interests of minority shareholders and promoting corporate democratic values. By limiting the growth of SVR shares, SEBI aimed to avoid situations where established management could misuse increased voting rights for their own benefit, with a focus on advancing the overall welfare of shareholders. This regulatory approach highlighted India’s dedication to encouraging transparent corporate governance and guaranteeing fair treatment of all shareholders, regardless of their ownership stakes. In 2019, SEBI had significantly reversed its decision by allowing SVR shares again but disallowing shares with inferior voting rights. The new policy is more subtle than the old policy-recognizing both that corporate have evolved and that shareholders need a healthy balance of power and regulation. The whole idea of allowing SVR shares was to encourage entrepreneurship and innovation, and to give promoters greater autonomy, but this could be done while seeking to preserve the tenets of shareholder democracy and holding them accountable. Issuance of DVR shares was regulated by section.
43(e) of the Companies Act, facilitating companies to structure their equity as per individual organizational requirements. DVR shares, including SVR, and Inferior/Fractional Voting Right (IFVRs) shares, have broken away from the ‘one share, one vote’ tradition, providing companies with various scope of voting arrangements to adapt to their governance objectives and shareholder dynamics.
An Overview of Differential Voting Rights (DVRs)
Differential Voting Rights (DVRs) are shares which carry rights disproportionate to their economic ownership. Though they were originally conceived as a tool for increasing share ownership among a broad investor base, DVRs tend to be used to dilute the control of other shareholders. These are by no means exhaustive but here are a few common varieties: The EVR (Enhanced Voting Rights) share which gives more votes per share The LVR (Lower Voting Rights) share which offers fewer votes but more dividends This has helped companies in balancing the need for raising capital on one side with the need to not dilute the control of the major shareholders / founders on the other side. DVRs have been used historically in many markets. In the U.S., companies including Alphabet Inc. and Meta Platforms have also used dual-class shares to keep founders in charge. DVRs are rarer in the UK because of proponent regulations, particularly for one-vote-one-share however they are still legal under specific conditions. The introduction of DVR shares has also been allowed by SEBI in India to give companies greater flexibility to issue shares with, for example, lower voting rights but higher dividends, with Tata Motors and Future Retail among those listed upfront. DVRs can provide varied voting rights and dividend payouts as opposed to common shares, enable middle management from the largest shareholders and cater to the choices of a broad list of investors compared to traditional shares. Yet, they could be subject to greater regulatory scrutiny and market skepticism. DVRs in India do support capital raising without diluting control, enable flexibility, promote economic growth, and stimulate opportunity. This ensures transparency and fairness in the issuance of DVRs, and in the governance of companies which issue DVRs, he added.
The Reasoning for DVRs in India
The adoption of DVRs in the Indian corporate sector spurs investment but control is not diluted completely with shares having varied voting rights enabling the issuer to raise capital without losing control. In addition, DVRs provide companies the flexibility in their capital structure to cater different equity offerings suitable to their requirements. The advantage is on both sides as established firms can get financing but also keep the control and founders can get the money but can continue to run the show. SEBI and other regulatory bodies oversee the regulatory framework for DVRs in India. This includes guidelines like: The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 provide guidelines for Indian companies regarding the issuance of DVRs. They detail the eligibility criteria, disclosure obligations, and other requisites that companies must follow when issuing DVRs. The Companies Act of 2013 establishes the legal framework for the establishment, administration, and functioning of companies in India. It includes provisions concerning the issuance of shares with varying rights, such as DVRs, provided that companies adhere to specific conditions. The SEBI (Listing Obligations and Disclosure Requirements) Regulations from 2015 supervise the listing of securities on Indian stock exchanges. They entail rules about disclosure requirements for companies issuing DVRs and the duties of listed companies concerning their DVR shareholders. SEBI issues circulars and guidelines at intervals to clarify and refine the regulatory structure concerning DVRs in India.
These resources offer extra guidance to companies and investors on aspects such as issuance, trading, and corporate governance concerning DVRs, aiming to enhance clarity and effectiveness in the regulatory environment.
Challenges and Criticisms of DVRs
Commentary on the difficulties and criticisms associated with dual-class voting rights (DVRs) has been well-documented in the context of corporate governance and the level playing field for investors. A significant concern is that controlling shareholders who may have a huge economic stake are able to entrench themselves in a position to control without corresponding economic interest and thus make non-value-maximizing decisions for non-controlling shareholders. This often results in reduced accountability because dominant shareholders are less likely to be disciplined by other stakeholders, manifesting as governance issues. The problem with this is no balanced oversight can equate to inefficiency and corruption. This can reduce investor confidence which could lead to weakening influence and a lower stock valuation for minority shareholders. While providing peace of mind to founders, stablecoins have been criticized for governance oversight and market sentiment challenges, threatening corporate governance and investor relations. Dhimmi-fication can disenfranchise minority shareholders and create concerns of how decisions are made within the company.
Are DVRs a Futile Attempt?
(DVRs) in India is a concept where founders can raise capital without diluting their management control. But the extent to which they have been effective, and been implemented, has cast doubt on their use in corporate governance in general. DVRs are unattractive to investors given the potential for governance abuses and diminished stockholder power. DVRs that concentrate power also risk consolidation of control and reduced transparency, which can deter participation from institutional investors and hinder market appeal. While DVRs offer a combination of certainty and flexible funding, they also risk alienating minority shareholders and create the perception in the market that they might be a case of too little, too late when it comes to actually encouraging for real corporate governance reform in India.
Alternative Strategies for Enhancing Corporate Governance
DVRs aren’t the sole route to sound corporate governance in India. To avoid repercussions, companies must embrace their hybrid nature and fortify shareholder rights, possibly by offering preferential shares and legal protections for minorities. Transparency and accountability must also be reinforced through stricter disclosure requirements and compliance audits. Additionally, board diversity and independence should be enhanced to broaden perspectives and mitigate conflicts of interest, ultimately improving governance effectiveness. These reforms, alongside others, promise to collectively fortify and ensure equity in corporate governance across India.
Legal jargon
Differential Voting Rights (DVR) shares
Companies (Amendment) Act, 2000
Superior Voting Right (SVR) shares
Inferior/Fractional Voting Right (IFVR) shares
Moratorium
Section 43(e) of the Companies Act
‘One share, one vote’ tradition
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
Companies Act of 2013
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
The proof
Differential Voting Rights (DVR) shares:
“Introduction of Differential Voting Rights (DVR) shares in India was a radical change in the corporate governance regulations.”
“DVR shares %UFFFD Born Out of the Companies (Amendment) Act, 2000. The idea behind DVR shares was to provide companies a flexible tool to design their capital structure as well as the management control in the company.”
Companies (Amendment) Act, 2000:
“DVR shares %UFFFD Born Out of the Companies (Amendment) Act, 2000.”
Superior Voting Right (SVR) shares:
“The Securities and Exchange Board of India (SEBI) had in 2009 clamped a moratorium on any such issuance of shares with Superior Voting Right (SVR).”
“In 2019, SEBI had significantly reversed its decision by allowing SVR shares again but disallowing shares with inferior voting rights.”
Inferior/Fractional Voting Right (IFVR) shares:
“DVR shares, including SVR, and Inferior/Fractional Voting Right (IFVRs) shares, have broken away from the ‘one share, one vote’ tradition, providing companies with various scope of voting arrangements to adapt to their governance objectives and shareholder dynamics.”
“In 2019, SEBI had significantly reversed its decision by allowing SVR shares again but disallowing shares with inferior voting rights.”
Moratorium:
“The Securities and Exchange Board of India (SEBI) had in 2009 clamped a moratorium on any such issuance of shares with Superior Voting Right (SVR).”
Section 43(e) of the Companies Act:
“Issuance of DVR shares was regulated by section 43(e) of the Companies Act, facilitating companies to structure their equity as per individual organizational requirements.”
‘One share, one vote’ tradition:
“DVR shares, including SVR, and Inferior/Fractional Voting Right (IFVRs) shares, have broken away from the ‘one share, one vote’ tradition, providing companies with various scope of voting arrangements to adapt to their governance objectives and shareholder dynamics.”
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018:
“The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 provide guidelines for Indian companies regarding the issuance of DVRs.”
“They detail the eligibility criteria, disclosure obligations, and other requisites that companies must follow when issuing DVRs.”
Companies Act of 2013:
“The Companies Act of 2013 establishes the legal framework for the establishment, administration, and functioning of companies in India.”
“It includes provisions concerning the issuance of shares with varying rights, such as DVRs, provided that companies adhere to specific conditions.”
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:
“The SEBI (Listing Obligations and Disclosure Requirements) Regulations from 2015 supervise the listing of securities on Indian stock exchanges.”
“They entail rules about disclosure requirements for companies issuing DVRs and the duties of listed companies concerning their DVR shareholders.”
Conclusion
The emergence and transition of Differential Voting Rights (DVRs) in India has gone through quite a number of regulatory tweaks and policy orientation to strike an ideal co-existance of corporate growth and minority shareholders’ protection Pitched as a way to raise capital and preserve control, from the outset, DVRS have faced considerable opposition. Authorities have tried to make the use of DVRs compulsory and while the DVR market has been using regulatory mandates in several jurisdictions; there have been a number of issues preventing the widespread adoption of DVRs. The dearth of knowledge and understanding surrounding D.V.R. offerings has curbed investor interest and, amid worries about potential abuse of voting rights, raised corporate governance issues. Some 20 odd years later, and few have gone the DVR route. While DVRs seem to provide the best of both of worlds: control and capital, implementing them requires some pondering as well. Whilst DVRs can also lure start-ups and new ventures by enabling fundraisings without a concurrent dilution of control, investors are likely to be disinclined to invest if their interests are not properly protected. Finding the right middle ground between protecting the founder and protecting the minorities is no easy task. To make sure the upsurge wouldn’t backfire, clearer communication, understanding and sharper regulation is needed as India Inc undergoes change.
FAQS
Q1: What was the primary reason for introducing DVR shares in India?
A1: The primary reason for introducing DVR shares was to provide companies with a flexible tool to design their capital structure and management control. It also aimed to encourage entrepreneurship and innovation by giving promoters greater autonomy while preserving shareholder democracy.
Q2: Why did SEBI clamp a moratorium on SVR shares in 2009?
A2: SEBI clamped a moratorium on SVR shares in 2009 due to apprehensions about misuse by powerful promoters with high voting control, which could subordinate the rights of minority investors, especially in family-owned businesses. SEBI intervened to safeguard the interests of minority shareholders and promote corporate democratic values.
Q3: How did SEBI’s policy on DVRs change in 2019?
A3: In 2019, SEBI significantly reversed its 2009 decision by allowing SVR shares again but disallowing shares with inferior voting rights (IFVRs). This new policy recognized the evolution of corporations and the need for a healthy balance of power and regulation among shareholders.
Q4: What are some of the advantages of DVRs for companies in India?
A4: DVRs in India support capital raising without diluting control, enable flexibility in capital structure, promote economic growth, and stimulate opportunity. They allow established firms and founders to secure financing while maintaining control.
Q5: What are the main challenges and criticisms associated with DVRs?
A5: A significant concern with DVRs is that controlling shareholders can entrench themselves and make decisions that may not maximize value for non-controlling shareholders, leading to reduced accountability and governance issues. This can also reduce investor confidence and lower stock valuation for minority shareholders. DVRs also risk alienating minority shareholders and can deter participation from institutional investors.
Q6: Are DVRs the only way to achieve sound corporate governance in India?
A6: No, DVRs are not the sole route to sound corporate governance in India. Alternative strategies include strengthening shareholder rights (e.g., preferential shares, legal protections for minorities), reinforcing transparency and accountability through stricter disclosure requirements and compliance audits, and enhancing board diversity and independence.
