Companies Can Retain DVR Shares With Differential Voting & Dividend Rights if Issued Before SEBI’s Restrictive Circular

Informal Guidance No. CFD/PoD/OW/2024/7086/1, Dated 16.05.2024

Facts of the case

Jagatjit Industries Limited, a public company listed on BSE, engages in alcoholic beverages, malted milk food products, malt extracts, extra neutral alcohol, and real estate. During the year 2004, JIL with the approval of the shareholders issued and allotted 25,00,000 equity shares carrying differential rights as to dividend and voting i.e. Nil dividend and Twenty voting rights per share (DVR Shares) of Rs. 10/-each at a premium of Rs. 20/- per share as preferential allotment, to one of the promoter companies viz. M/S. LPJ Holdings Private Limited.

The DVR shares, though not listed due to their different class, were upheld as valid by the Company Law Board in 2009. Accordingly, the said DVR shares form part of the total share capital of the Company. LPJ Holdings, the acquirer, made a compliant Open Offer to the Public under SEBI’s SAST Regulations, 1997.

Legal Provisions

As per the Section 43 (a) (ii) of the Companies Act, 2013, a company limited by shares is allowed to issue DVRs as part of its share capital. Further, Rule 4(3) of the Companies (Share Capital and Debentures) Rules, 2014 states “that the Company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice versa”.

Further, SEBI vide its circular dated July 21, 2009 restrained the issuer companies for issue of shares in any manner which may confer on any person, superior rights as to voting or dividends vis-a-vis the rights on equity shares that are already listed.

The net effect of this circular resulted in companies being prohibited from issuing superior voting rights or lower voting rights with higher dividends as compared to ordinary equity shares that were already listed. Thus, as a result of the abovementioned circular, Indian companies who opted for issuance of shares with DVRs did so by issuing bonus shares with lower voting rights but carrying the same dividend rights as ordinary shares.

The SEBI, vide Notification dated 29th July, 2019, SEBI notified the SEBI (LODR) (Fourth Amendment) Regulations, 2019 pertaining to outstanding SR equity shares i.e. equity shares having superior voting rights compared to all other equity shares issued by an Issuer.

Guidance sought by the applicant

The company has sought interpretive guidance from SEBI on the following issue:

1. Whether the existing DVR shares of our Company Jagatjit Industries Limited shall continue to retain their distinct characteristics of differential voting rights or they will be treated as ordinary equity shares at par with the other equity shares of the Company.

2. Whether the Company is required to comply with the conditions prescribed in Regulation 41A of SEBI LODR and compliance, if any is required to be made by the Company.

Comments by the SEBI

The SEBI vide Informal Guidance No. CFD/PoD/OW/2024//7086/1, Dated 16.05.2024, stated that before July 21, 2009, listed companies could issue differential right equity shares. However, a SEBI circular on July 21, 2009, disallowed fresh issuances of “superior” rights equity shares. The circular did not address the treatment of already issued superior right equity shares.

In 2019, SEBI introduced an SR equity shares framework. This framework allows companies that have issued SR equity shares to their promoters or founders to undertake an IPO of ordinary shares under certain conditions. Additionally, the SCRA was amended to require that these SR equity shares be listed along with the ordinary shares offered to the public. However, the SR framework does not address superior right equity shares already issued by listed companies.

As per the Companies (Share Capital and Debentures) Amendment Rules, 2014, DVR shares issued under the Companies Act, 1956, continue to be regulated under those provisions. In conclusion, Regulation 41A of SEBI LODR i.e., Other provisions relating to outstanding SR equity shares, does not apply to JIL’s existing DVR shares.

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