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Sebi to reintroduce DVR shares for listed companies

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Sebi has made a sub-committee for reintroducing differential voting rights, or DVR, shares that will make recommendation next month

Mumbai: Differential voting right (DVR) shares, which offer higher dividends but no voting rights, are set to make a comeback for listed companies after nine years. The Securities and Exchange Board of India (Sebi) has made a sub-committee under the Primary Markets Advisory Committee (PMAC) for re-introducing DVRs for listed companies, said Ajay Tyagi, chairman, Sebi, at a summit organized by the Association of Investment Bankers of India on Tuesday.

DVRs are a way for companies to raise equity capital without dilution of promoter shareholding. DVR shareholders typically get higher returns in lieu of ‘no voting rights’. This is also a mechanism to prevent hostile takeovers.

“These shares are more relevant for new-age or technology-driven companies. However, there is also a need to have a balancing act on corporate governance,” said Tyagi.

Globally, it is an accepted concept where there are category of shareholders. “This is an opportune time to consider shares with DVR. It opens up various fundraising and deal structuring options for Indian companies. Globally, companies such as Google use DVR capital structures,” said Abhimanyu Bhattacharya, partner, Khaitan and Co.

Yogesh Chande, partner, of law firm Shardul Amarchand Mangaldas, said the proposal should be sector agnostic.

According to a person familiar with the matter, the sub-committee will make recommendations next month and will suggest a phased manner of reintroduction of DVRs. “Large-cap companies such as the top 100 will be allowed to do this in the first stage for the purpose of deleveraging. This will help them in raising equity without dilution of voting rights,” said the person cited above, requesting anonymity.

“Another approach is to allow these shares only to companies who require multiple rounds of funding and have low promoter holding. There is a possibility that if there is low promoter holding, then every round of fundraising will further reduce their stake, making them susceptible to hostile takeovers,” he added.

Most major Indian companies are promoter-driven, with low minority shareholding, so hostile takeovers are not common.

“It has to be seen if the idea suits a majority of listed companies and if it needs to be allowed for top 100 or 500 listed companies on a test basis, as it had done for rules on integrated reporting or business responsibility reports. Any change will require a review of regulations governing listing and disclosures, insider trading, takeover and prohibiting a scheme to commit securities fraud,” said Sumit Agrawal, partner, RegStreet Law Advisors, who is also a former Sebi official.

“The relook comes after some large corporates made representations before the Sebi saying that this will help them in deleveraging without raising debt,” said the person, requesting anonymity.

On 21 July, 2009, Sebi had issued a circular prohibiting issue of shares with superior voting rights by listed companies through amendments in the listing agreement.