Sebi provides scaffold for minority shareholders

The market watchdog has moved in to check promoters helping themselves to greater control of companies

 In a market where there are few cases of stocks with differential voting rights (DVRs), last week’s change to the Equity Listing Agreement, at first glance, seems to protect the interests of minority shareholders. Sebi’s step is ostensibly to prevent situations wherein companies come out with follow-on-issues, rights issues or preferential allotments with higher voting rights per share, helping promoters get greater control in the company.

Stock structure

Though a rarity in India, there are many examples abroad such as the Ford family, which controls 40 per cent of shareholder votes with only about 4 per cent of the equity in Ford Motors.

The dual-class stock structure has worked for many including Warren Buffett, a majority shareholder of Berkshire Hathaway, which offers Class-B shares with 1/200th of the voting rights of a Class A share.

Google, at the time of going public, reserved Class-B shares with 10 votes a share for insiders and sold Class-A shares with one vote to the public, helping retain control with select shareholders. It’s not that the amendment by the Securities & Exchange Board of India (Sebi) last Wednesday sealed such a possibility in India as the US stock exchanges, the NYSE or the Nasdaq, too, do not allow it.

The New York Stock Exchange allows companies to list dual-class voting shares, but once listed, firms cannot reduce the voting rights of the existing shares or issue a new class of superior voting shares.

Second look

A second look at Sebi’samendment shows something else. “More than preventing issue of fresh shares with superior rights, the amendment is about allowing firms to come out with shares with inferior rights,” said SMC Capitals equity head Jagannadham Thunuguntla.

Though shares with differential voting rights is not new in India (Tata Motors and Pantaloon issued shares with DVRs last year), lack of awareness has kept trading in DVR shares insignificant, he said.

According to Sebi regulations, firms can come up with fresh issues that offer inferior rights in terms of voting or dividend, thereby helping raise equity without resorting to debt and giving up control.

Visionary move

In times of global financial crisis and slowdown, the regulator’s move is seen as “visionary” by Thunuguntla. The move would encourage promoters of India Inc to raise additional equity without worrying about takeovers.

While to date the market has given a thumbs down to DVR shares in India, the success of the dual-class stock structure will largely depend on the perception of the market.
Market experts say there may not be many takers for DVR shares as it is feared that dual-class shares can result in poor corporate governance as they bifurcate control from taking on financial risk.

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