Promoters of unlisted companies have reasons to cheer after the Securities and Exchange Board of India (Sebi) released a consultation paper on the issuance of shares with differential voting rights (DVRs). The issuance of shares with higher voting rights was banned in 2009. The latest move shows Sebi is seized of the problem that many unlisted start-up promoters face — the constant need for funds to fuel growth without losing control over their firms. The regulator has also proposed listing such companies, provided the shares with superior voting rights are held by promoters for more than one year before filing the draft prospectus. Last year, both the Hong Kong and Singapore stock exchanges allowed the listing of companies with dual-class shares.
To aid the listing process, Sebi has proposed to relax regulations such as the requirement of consistent profits for three years before issuing DVRs, allowing promoters to hold “superior” shares post listing and changes in the takeover code. However, these shares cannot be issued after listing, traded or pledged. Globally, promoters of some of the leading listed companies Alphabet (promoter of Google), Facebook and Alibaba have used this route to retain control over their firms. In its consultation paper, Sebi has followed the structure followed in these companies in terms of the number of votes allowed per share. That is, in the case of superior voting rights, one share can have a maximum of 10 votes, and for the fractional voting rights, 10 shares can have one vote.
Facebook is a good test case. On the one hand, it has taken a lot of flak because Zuckerberg and other promoters have voting rights of almost 70 per cent. At the same time, Zuckerberg’s decision to buy Instagram for $1 billion in 2012 by using his significantly higher voting rights has paid rich dividends as Instagram’s value grew to $100 billion in 2018 — a good example of the founder’s vision leading to value enhancement for all shareholders.
Sebi’s move comes at a time when there is a raging debate regarding the one-share, one-vote versus “superior” shares globally. Leading fund managers and corporate governance experts have issued warnings that dual-class shares would reduce the oversight of the public, thereby reducing the management’s accountability to these shareholders. Also, such structures hinder the ability of the board of directors to exercise their duties. Critics argue that such decoupling of voting rights from economic ownership is detrimental to shareholders, especially in the long run, because it allows companies to avoid the threat of the market mechanism, which has historically kept managements in check. Other arguments against such structures include abuse by family-owned businesses by giving themselves considerably higher compensation packages, little influence of shareholders if things go wrong, and perpetual voting rights that can be transferred.
But Sebi has been prudent by taking a conservative approach in this regard. For example, the proposal is to have a sunset clause of five years after listing, and if the majority of the shareholders agree, it can be extended by another five years. There are several other restrictions: Post-IPO, superior shares will be treated as ordinary shares in the case of appointment/removal of independent directors or auditor; change in control of the company; voluntary winding up of the company; and others. This would result in adequate checks and balances so that chances of abusing the system are minimised.