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July 22, 2009 No more “superior rights” in Listed
Companies On
July 21, 2009, the Securities and Exchange Board of India (“SEBI”)
issued a letter addressed to the stock exchanges, directing them to amend
provisions of the Equity Listing Agreement (“Listing Agreement”).
The amendment is to include a clause that provides that the issuer (company)
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.
Background
The issue of equity shares with differential rights (including differential
rights as to voting, dividend or otherwise) (“Differential Shares”)
is governed by the provisions of Section 86 (a)(ii) of the Companies Act,
1956, together with the Companies (Issue of Share Capital with Differential
Voting Rights) Rules, 2001 (“Rules”).
Under the aforesaid provisions, a company limited by shares could issue
Differential Shares not exceeding 25% of the total issued share capital.
Differential rights would mean, in the context of voting, any equity share
that is entitled to less than one vote per share (excluding the right to
vote on alteration of rights attached to such shares), or more than one vote
per share. A listed company may issue Differential Shares only if it has
obtained the approval of its shareholders through a postal ballot.
The perception by market regulators that the issue of Differential Shares to
a person would be detrimental to the interests of the minority shareholders,
resulted in the proposal to completely abolish the right of both public and
private companies to issue Differential Shares in the Companies Bill, 2008.
The objective of enacting this provision appears to have been to bring about
equality insofar as equity shares were concerned. Amendment
The Companies Bill, 2008 is yet to be passed. However, SEBI has issued
directions to the stock exchanges to amend the Listing Agreement to make the
prohibition effective against listed companies. The direction provides for
the addition of a new clause 28A, which states as follows:
“28A. 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.” Implications
The amendment speaks of ‘shares’, without specifying whether the intention
is to cover equity shares only. Therefore, the amendment would, on a literal
interpretation, include preference shares as well, which, under the
Companies Act, 1956, already have superior rights vis-à-vis dividend and
liquidation than equity shares. Therefore, this amendment could have the
effect of preventing listed companies from issuing preference shares as
well.
The direction from SEBI does not clarify what is meant by ‘superior’ rights.
The amendment seems to imply that a listed company cannot issue rights
superior to those statutorily conferred to a holder of equity shares in
accordance with the Companies Act, 1956. Therefore, a listed company may
still be able to issue shares with ‘inferior’ rights with respect to voting,
dividend or otherwise, if this is commercially acceptable to the investor.
Further, the meaning of ‘superior’ rights could also be construed to mean
and include affirmative voting rights that are often granted to investors
holding such equity shares.
The amendment could have a direct impact on private investment in public
equity (PIPE investments) in
The direction from SEBI also does not suggest what happens to the
Differential Shares already issued by some listed companies (notably Tata
Motors and Pantaloon Retail). One view is that Differential Shares issued
prior to this amendment will have to be rationalized, since listed companies
are required to be in compliance with the Listing Agreement at all times. If
this is the case, the amendment neither addresses the time nor the manner in
which this rationalization should be achieved. Conversely, another view is
that since the Listing Agreement governs the listed equity shares, the
amendment is intended to cover only prospective issuances of Differential
Shares, and will not affect issuances made before the date of the amendment.
Conclusion
The amendment lacks clarity on the issues pointed out above, and could lead
to confusing interpretations. The need of the hour is for SEBI to clarify
these issues at the earliest. Considering the grim state of investments
generally, it would augur well for the capital markets regulator to
stimulate investment activity, rather than stifle it.
- Rohini Agarwal & Kartik Ganapathy
You may direct your comments to Ramya Krishnan-AniL +91 900465 0363 |
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