SEBI Board Approves Framework For DVRs, New Definition Of ‘Encumbrance' And Clarifications To The Insider Trading Regulations

Author:Mr Abhinav Kumar and S Vivek
Profession:Cyril Amarchand Mangaldas

The Securities and Exchange Board of India ("SEBI") at its board meeting on June 27, 2019 approved the following important proposals, which become effective on the formal amendment of the respective regulations. A brief summary of the significant changes are set out below:

  1. Framework for issue of shares with Differential Voting Rights ("DVR")

A company having superior voting rights shares would be permitted to undertake an initial public offer of its ordinary shares, subject to, amongst others, the following conditions:

Eligible companies and voting rights: Tech companies (defined under Innovators Growth Platform) are permitted to issue shares with superior rights ("SR"), which are permitted voting rights of a minimum of 2:1 and maximum of 10:1 compared to ordinary shares. The total voting rights of SR shareholders (including ordinary shares) post listing has been capped at 74%. Eligible holders: SR shareholder to be part of the promoter group whose collective net worth does not exceed Rs. 500 crore (excluding the investment by such shareholder in the issuer company) and such shareholder is required to hold an executive position in the company. Enhanced corporate governance: At least half the board and 2/3rd of all committees (other than audit committee) to comprise independent directors and the audit committee to comprise only independent directors. Coat-tail: SR Shares to be treated as ordinary shares in certain circumstances such as appointment or removal of independent directors, material transactions based on thresholds under the SEBI Listing Regulations and changes in the articles and memorandum (other than changes affecting SR Shares). Holding period and lock-in: SR shares to be held for at least six months prior to filing of red herring prospectus. SR shares to be listed post the IPO but locked-in until conversion to ordinary shares. Sunset Clauses: SR Shares to convert to ordinary shares on the 5th anniversary of listing (extendable by a further five years) or in the event of change of control or resignation of SR shareholder 2. Disclosure of Encumbrances

In the context of concerns on promoters raising funds from mutual funds and NBFCs through structured obligations, pledge of shares and similar structures, amendments to the SEBI Takeover Code in relation to encumbrance of shares of listed...

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