DVRs: SEBI flip flop!

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DVRs: SEBI flip flop!

If there's one issue that plagues all business in India, it's regulatory flip flop. Earlier, we highlighted the regulatory schizophrenia regarding warrants. Here’s another case of differential voting rights shares, which is known as DVRs in the interest of brevity.

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If there's one issue that plagues all business in India, it's regulatory flip flop. Earlier, we highlighted the regulatory schizophrenia regarding warrants. Here's another case of differential voting rights shares, which is known as DVRs in the interest of brevity.

Company law allowed DVRs in 2000-2001. Since then about four companies have issued them. The noteworthy one in a negative sense actually has been Jagatjit Industries. The promoters issued themselves superior voting right shares. That's big governance boo boo. The big one came in September 2008. Tata Motors raised a couple of thousand crore rupee via a DVR issue of lower voting rights but higher dividend shares. At that time Securities Exchange Board of India (SEBI) allowed the Tata Motor DVR issues, in fact was quite helpful in introducing a new product in the market. Ten months later Sebi changed the rules saying no company can issue shares with superior voting or superior dividend rights.

This new rule confused Tata Motors, which wrote to Sebi in April this year, asking for informal guidance whether the existing rights of its DVR share or 'A' class shareholders are maintained? If existing DVR shareholders can receive new DVR shares as part of a bonus or rights issue and if a fresh issue of DVR shares can be made on same terms as existing DVRs, via a follow-on public offer (FPO), preferential allotment or qualified institutional placement (QIP)? Can Tata Motors issue DVR shares upon exercise of a previously sold convertible issue? Can DVR shares be offered as part of the company's Employee Stock Option Plan (ESOP) scheme? Sebi said yes to all these questions which were answered no last year.

Are DVR shares with higher voting rights allowed or not? Somasekhar Sundaresan of JSA and Pankaj Jaju of Enam speak about it.

Here is a verbatim transcript of the video. Also watch the video.

Q: What this means here onwards? I understand the Sebi has protected the right of existing DVR shareholders of Tata Motors by allowing for the issue of fresh DVR shares through bonus or writes issues. How come they have allowed for the issue of fresh DVR shares also through follow-on offers, preferential allotments or qualified institutional placements (QIP) because these will go to the new shareholders and not existing DVR shareholders? What am I to make of it?

Sundaresan: My reading of this informal guidance is that Sebi has allowed a grandfathering of anything that's happened before the amendment because these securities got issued before the listing agreement got amended to prohibit issuance of superior voting rights or superior dividend rights. Sebi seems to have said that since one class of securities is already come into being, let that class of securities continues. You could have a question about - can a fresh issue at all be made. That's again a policy question. According to me, Sebi said that you guys got in before the amendment so you are being treated slightly differently.