Sebi permits tech firms with differential voting rights to list

Mumbai: Markets watchdog Sebi Thursday issued a new framework for issuing differential voting right shares by tech companies, effective July 1, making the process easier for the promoters of such companies go in for initial public offers.

After the board meeting, Sebi chairman Ajay Tyagi told reporters that under the new framework a tech company having superior voting rights shares (SR shares) will be permitted to do an initial public offering of only ordinary shares to be listed on the main board.

Tyagi said the new framework is applicable only for tech companies, which Sebi defines as per its 'innovators growth platform' norms, as those which intensively use technology, information technology, intellectual property, data analytics, bio-technology or nano-technology to provide products, services or business platforms with substantial value addition.

Sebi said the changes are necessitated by the need to enable issuance and listing of shares with differential voting rights since such shares have rights disproportionate to their economic ownership.

The regulator, however, said this will be subject to conditions like the SR shareholder should be a part of the promoter group whose collective networth does not exceed Rs 500 crore and that while determining the collective networth, and the investment of SR shareholders in the shares of the issuer company shall not be considered.

It further said the SR shares have been issued only to the promoters/founders who hold an executive position and the same has been authorised by a special AGM resolution. This would mean that SR shares have been held for at least six months prior to the IPO filing.

The regulator also said SR shares have voting rights in a ratio of minimum 2:1 to maximum 10:1 compared to ordinary equity shares.

On the listing and lock-in, Sebi said SR shares shall also be listed on stock exchanges after the issuer makes a public issue. However, SR shares shall be under a five year lock-in after the IPO until their conversion to ordinary shares. Transfer, pledging or lien of SR shares among promoters is also not permitted.

Post-listing, SR shares will be treated at par with the ordinary equity shares in every respect, including dividends, except in the case of voting on resolutions. The total voting rights of SR shareholders (including ordinary shares), shall not exceed 74 percent.

Sebi also set enhanced corporate governance conditions for such companies. Accordingly, firms with SR shareholders will have to ensure that at least 50 percent of its board and two-thirds of its committees (excluding audit committee) shall comprise independent directors, while the audit committee will have only independent directors.

Also, post-IPO, SR shares will be treated as ordinary equity shares in terms of voting rights, which means that one SR share will have only one vote when it comes to voting on al key matters like appointment/removal of independent directors and auditors.

The one-vote norm will also apply to approvals like promoter willingly transferring control to another entity, related party-transactions involving SR shareholders, voluntary winding up of the firm, changes in the article of association except any changes affecting the SR instrument, initiation of a bankruptcy process, funds use, and on delisting or share buyback among others.

On sunset clauses, Sebi said SR shares can be converted into ordinary shares after five years of listing which can be extended once by five more years. But SR shareholder cannot vote on such resolutions. SR shares will compulsorily get converted into ordinary shares on the death or resignation of SR shareholders, merger or acquisition where the control is no longer with SR shareholder, etc.

Meanwhile, Taking a serious note of some mutual fund houses' exposure to loan against share schemes, the markets regulator Sebi Thursday tightened the norms for disclosing the details of pledged shares by promoters.

Loan against share schemes involve debt mutual funds investing in debt papers of little-known/lower-rated companies on the backing of promoter shares.

As per the new directions issued after a board meeting, Sebi said any direct, indirect lien on shares will qualify as encumbered shares.

"The promoters will have to furnish reasons if combined encumbrance crosses 20 percent of the company's equity capital," Sebi said after the board meeting.

It can be noted that following the liquidity crisis among leading NBFCs, which began after the IL&FS group went belly up last September, shadow banks like DHFL, and media powerhouse Zee group among others had defaulted on their debt.

Both these companies however entered into standstill agreements with their lenders.

The largest AMC, HDFC Asset Management Company had said it would buy back NCDs of DHFL worth Rs 500 crore which it could not redeem on time from its fixed income plan investors. This meant that the shareholders of HDFC AMC would take a hit of Rs 500 crore.

However, Kotak AMC, which also could not redeem its units on time, had asked its fixed income plan investors to wait for another year for payments.