Companies Can Retain DVR Shares with Differential Voting & Dividend Rights Issued Before SEBI's Restrictive Circular: SEBI

Jagatjit Industries Limited (JIL), a public limited company engaged in the production of alcoholic beverages, malted milk food products, malt extracts, extra neutral alcohol, and real estate, has sought clarification from the SEBI regarding the status of its DVR shares. These DVR shares, issued in 2004, carry unique rights concerning dividends and voting compared to the company's ordinary equity shares.

JIL issued 2.5 million DVR shares in 2004 under Section 86 of the then Companies Act, 1956. These shares, carrying twenty voting rights per share but no dividend rights, were allotted to LPJ Holdings Private Limited, one of JIL's promoter companies, at Rs. 30 per share (Rs. 10 face value and Rs. 20 premium). Since these shares constituted a different class, they were not listed on the stock exchange.

The regulatory landscape for DVR shares has evolved significantly since 2004. Section 43(a)(ii) of the Companies Act, 2013, permits companies to issue shares with DVRs. Rule 4(3) of the Companies (Share Capital and Debentures) Rules, 2014, specifies that companies cannot convert existing equity shares with voting rights into DVR shares and vice versa.

Additionally, SEBI's circular dated July 21, 2009, prohibited the issuance of shares with superior voting rights or preferential dividend rights compared to listed equity shares. This led to a shift where companies issued DVRs with lower voting rights but the same dividend rights as ordinary shares.

In 2019, SEBI introduced a framework allowing companies to issue superior rights (SR) equity shares, which grants higher voting rights compared to ordinary shares. However, this framework applied to unlisted companies or those planning an Initial Public Offering (IPO) and did not address existing DVR shares.

JIL sought SEBI's interpretive guidance on whether their existing DVR shares, issued before the 2009 regulatory changes, could retain their differential characteristics or if they should be treated as ordinary equity shares.

SEBI clarified the following:

1. SEBI confirmed that JIL's DVR shares issued in 2004 could retain their distinct characteristics of differential voting rights. The regulatory changes introduced in 2009, which prohibited the issuance of new superior rights shares, did not retroactively apply to DVR shares already issued by listed companies.

2. SEBI clarified that Regulation 41A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which pertains to the issuance of SR equity shares, does not apply to JIL's existing DVR shares. This regulation is relevant for new issuances and the listing of SR shares alongside an IPO of ordinary shares, not for shares issued under the older regulatory framework.