Govt Drops Plan To Abolish Dvr Share Issues
New Delhi: The government has dropped the plan to do away with practice of differential voting rights (DVR) shares, as this facility has been found to provide corporates legroom for raising capital. The Companies Bill, to be tabled in the monsoon session of Parliament, would, however, bring in a set of additional conditions to avoid misuse of DVRs. The parliamentary standing committee on finance that vetted the Bill had proposed retention of the DVR provision. One of the criteria being considered by the ministry is is to make companies clearly state the objective for a DVR issue. The ministry could also lay down certain corporate governance norms for a company to be eligible for issuing DVRs. The independent directors would need to approve these issues, which involve curtailing the voting rights of some shareholders.
The DVR provision was set aside by the ministry in the draft Companies Bill in 2008 citing possible misuse by companies. Sources, however, said that while the modified Bill is going to allow companies to use the DVR route, it would be subject to stricter regulations.
DVRs differ from normal share issuance that entail voting rights proportionate to investment. Differential voting rights can come either way: you get rights higher than what your shareholding would entail or a fraction of that, with the reduced rights being compensated through higher dividend payout. Though yet to become a popular tool in India, companies have resorted to DVRs for delinking economic interest and voting rights since its introduction in 2001. At times, DVRs can, for example, reduce the risk of any hostile takeovers from outside.
In 2008, Tata Motors became the first Indian company to issue DVRs at the time of acquiring the iconic British carmaker Jaguar-Land Rover. The company had issued over 60 million DVR shares to raise R4,145 crore through a rights issue for repaying the loan on JLR. Pantaloons and Gujarat NRE Coke too have issued DVRs.
“Though the new companies Bill is going to retain DVRs, these would be brought under stricter supervision,” a source privy to the discussions told FE. He said after the Bill is passed by Parliament, the ministry is going to come out with a set eligibility criteria for companies which can use the DVR route.
As per Section 86 of the extant Companies Act, only those companies are allowed to raise funds through DVRs which have recorded distributable profits for three financial years preceding the year of the issuance, clean record as per which it should not have defaulted in filing returns or indicted under the Sebi Act and approved by shareholders. Apart from these the regulations also state that shares with differential voting rights should not exceed 25% of the total share capital issued.
Company law experts said while the current conditions laid down in the Act are already very strict, the government could add a few more.
Managing director of Delhi-based institute Corporate Professionals Pavan K Vijay said the government’s decision to bring back DVRs would be welcomed by the industry. “Since there is already a lack of sufficient instruments to raise funds in India, putting a complete ban on DVRs is not an option. However, there are some options that the government can adopt to ensure transparency in its operations,” he said.
In 2001, the NDA government had allowed DVRs subject to conditions. However, in 2008, the ministry removed the option from the draft Companies Bill, sparking an industry uproar. In fact, soon after taking charge as corporate affairs minister, Murli Deora had a meeting with industry representatives, where the matter was discussed.