SEBI amends LODR in relation to equity shares with superior rights

Manoj Kumar Tiwari, Executive, Vinod Kothari & Company

SEBI has vide notification published in the Official Gazette dated July 29, 2019 notified the SEBI (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations, 2019 (‘Amendment Regulations’). The said Amendment Regulations shall come into force from the date of publication in the Official Gazette i.e. July 29, 2019.

The amendments pertain to compliances in relation to corporate governance provisions for listed entities which have issued shares with Superior Rights (SRs). SEBI has issued a framework for issuance of DVR as an outcome of SEBI Board Meeting held on June 27, 2019 some of which have been included in the Amendment Regulations.

Brief of the changes made in line with the framework are as under:

Regulation 17(1) w.r.t. Board Composition

• Atleast half of the board of directors of the listed company which has outstanding SR equity shares shall comprise of independent directors;

Regulation 18(1)(b) w.r.t. Audit Committee Composition

• The audit committee of a listed entity having outstanding SR equity shares shall comprise only of independent directors;

Regulation 19(1)(c) w.r.t. Nomination and Remuneration Committee (NRC) Composition

• Two third of the NRC of a listed entity having outstanding SR equity shares shall comprise of independent directors;

Regulation 20(2A) w.r.t. Stakeholders Relationship Committee (SRC) Composition

• Two third of the SRC of a listed entity having outstanding SR equity shares shall comprise of independent directors;

Regulation 21(2) w.r.t Risk Management Committee (RMC) Composition

• Two third of the RMC of a listed entity having outstanding SR equity shares shall comprise of independent directors;

Regulation 41(3) w.r.t prohibition on issue of shares with SR substituted with the following

• The listed entity shall not issue shares in any manner that may confer on any person;
  1. superior or inferior rights as to dividend vis-à-vis the rights on equity shares that are already listed; or
  2. inferior voting rights vis-à-vis the rights on equity shares that are already listed:
• a listed entity having SR equity shares issued to its promoters/ founders, may issue SR equity shares to its SR shareholders only through a bonus, split or rights issue in accordance with the provisions of the SEBI (ICDR) Regulations, 2018.

Regulation 41A – Other provisions relating to outstanding SR equity shares

A new regulation has been inserted w.r.t SR equity shares

• The SR equity shares shall 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) in the issuer upon listing, pursuant to an initial public offer, shall not at any point of time exceed seventy four per cent.
• List of Circumstances in which SR equity shares shall be treated as ordinary equity shares in terms of voting rights viz. appointment/ removal of IDs, RPTs involving SR shareholder, Voluntary winding up, Voluntary resolution process under IBC, changes in AOA/ MOA except change affecting SR equity share, delisting of equity shares etc.
• Conversion of SR equity shares into ordinary shares w.e.f. 5 years after listing of the ordinary shares. The same can be extended for further 5 years after passing a resolution to that effect, with the SR shareholders abstaining from voting.
• Circumstances when SR equity shares shall be mandatorily converted into ordinary shares viz. demise of promoter holding such shares, SR shareholder resigning from executive position, merger or acquisition of listed entity resulting in SR shareholders cease to have control etc;

The notification in the Official Gazette can be accessed here: http://egazette.nic.in/WriteReadData/2019/209215.pdf

The outcome of the SEBI Board Meeting held on June 27, 2019 can be accessed here: https://www.sebi.gov.in/media/press-releases/jun-2019/sebi-board-meeting_43417.html

The following Regulations have also been amended to include shares with superior voting rights.

SEBI (Delisting of Equity Shares) Regulations, 2009

Regulation 3 w.r.t applicability of the regulation

The term ‘shares’ shall include equity shares having superior voting rights.

The said amendment can be accessed here: http://egazette.nic.in/WriteReadData/2019/209243.pdf

SEBI (Buy-Back of Securities) Regulations, 2018

Regulation 3 w.r.t applicability of the regulation

The term ‘shares’ shall include equity shares having superior voting rights.

The said amendment can be accessed here: http://egazette.nic.in/WriteReadData/2019/209214.pdf