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

Last Updated: 10 July 2019
Article by Abhinav Kumar and S Vivek

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 companies have been approved.
  • 'Encumbrance' to be defined broadly to include any restriction on the free and marketable title to shares, whether executed directly or indirectly including pledge, lien, NDU or any covenant, transaction, condition or arrangement in the nature of encumbrance.
  • Reasons for encumbrance to be disclosed to stock exchanges if combined encumbrance by promoters and PAC exceeds 20% of the share capital or 50% of their shareholding in the listed entity.

3. Transactions by designated persons during trading window closure

  • SEBI has approved amendments to the Insider Trading Regulations clarifying that the trading window closure would commence from the end of every quarter until 48 hours after declaration of financial results.
  • In view of representations from the market on implications of such closure on transactions involving designated persons, certain relaxations have been approved. Subject to certain conditions that are to be prescribed, designated persons are permitted to undertake certain primary transactions (including rights and preferential issues), secondary transactions (block deals and inter-se transfers between insiders), conversion of warrants/debentures, pledge and tender offers (including buy-back and open offers), during the closed period.

4. Royalty and brand usage payments

  • Shareholder approval required for payments toward royalty and brand usage to related parties if they exceed 5% of the annual consolidated turnover of the listed entity (revised from the existing 2% threshold).
  • Implementation of the provision deferred until June 30, 2019.

While the above changes have been approved by the SEBI yesterday, the changes become effective only on formal amendment of the respective regulations.

To access the press release issued the SEBI click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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