Investment climate requires clarity on ‘superior rights’

The Indian securities market regulator, the Securities and Exchange Board of India (SEBI), issued a circular on 21 July which introduced the new clause 28A to the listing agreement. The provision states: “The company agrees that it shall not issue shares in any manner which may confer on any person, superior rights as to voting or dividend vis-à-vis the rights on equity shares that are already listed.”

Unsurprisingly the new clause has generated questions, discussion and debate in the Indian legal, securities and corporate world. This article briefly highlights some of the more common questions concerning the clause, and suggests some answers.

Differential voting rights

A frequent question is whether the circular seeks to do away with shares with differential voting rights (DVRs) in listed companies. Unlike the concept of superior rights, DVRs have a statutory foundation under the Companies Act, 1956. Since 2001 the act has expressly permitted the issuance of equity shares with differential rights as to dividends and/or voting (while also laying out certain rules on the issue of shares with DVRs). Shares with DVRs grant holders the right to exercise more (or if acceptable to the holder, less) than one vote per share held.

Sawant Singh is a partner and Arun Madhu an associate at Phoenix Legal in Mumbai. They can be reached at sawant.singh@phoenixlegal.in and arun.madhu@phoenixlegal.in.