SEBI prohibits issue of shares with “superior” rights

CA Jayant Thakur

15 years ago

SEBI has issued a circular dated July 21, 2009, to make amendments to prohibit issue of shares with superior voting rights by listed companies. This is pursuant to SEBI announcement discussed by Mr. Umakanth earlier in this blog here and that post makes an interesting analysis of the term “superior voting rights”, particularly in comparison with the existing term “differential voting rights”.

Incidentally, the actual amendment covers all superior rights as to voting as well as dividends. The original decision as per the Press Release read that “No listed company can issue shares with superior voting rights.”.

The amendment is by way of insertion of a new clause 28A to the Listing Agreement. The amendment is to come into immediate effect though because of the peculiar status of Listing Agreement, one will also have to wait for amendment of the Listing Agreement by respective stock exchanges.

The new clause is brief and is reproduced for ready reference:-

“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.”

Quick comments:-
– the prohibition is on issue of shares with “superior” rights and not on “inferior” rights.
– corollary from the earlier point, if a company issues shares with “inferior” rights, those shares will then become the new benchmark. If one takes this further logically, then, thereafter, even “normal” equity shares cannot be issued since these normal shares would have “superior” rights as compared to the existing shares with “inferior rights” assuming such latter shares are also listed!
– Can the amendment affect issue of preference shares which have priority of dividends and at times even rights of sharing further dividends? Or can one say that the intention is to cover issue of equity shares only since the comparison is made to existing equity shares?
– To bring the change into effect, the Listing Agreement is amended. This is curious. One would have thought the SEBI DIP Guidelines could have been a better place.
– Would special rights given to certain investors/promoters under the Article of Association such as veto rights, special rights, etc. be deemed to be “superior rights as to voting”? Can it be said that the ban applies only where the superior rights are given to the “shares” and not to the “persons” holding such shares?

– Jayant Thakur