19 June 2009

Superior voting rights - outlawed

In yesterday's Board meeting SEBI has come out with a prohibition on issuing superior voting rights. This is the correct thing to do and is an internationally accepted practice.

The Board decision as reflected in the PR says:

"(iv) Issue of shares with superior voting rights

No listed company can issue shares with superior voting rights. This will avoid the possible misuse by the persons in control to the detriment of public shareholders."

The New York Stock Exchange (NYSE) had prohibited DVRs from 1926 for over 50 years referring to their “long standing commitment to encourage high standards of corporate democracy”. There are still several restrictions in place in the NYSE and other markets. The SEC enacted rule 19c-4 under the Securities Exchange Act 1934 prohibiting issue of superior voting rights, but permitting issue of inferior voting rights. The former would have the effect of “nullifying, restricting or disparately reducing the voting rights” of one or more classes of outstanding common stock of the issuer. Inferior rights are permitted because anyone taking such shares purchases them knowing fully well their inferior rights and prices them accordingly and the previous shareholders do not stand diluted in their control and voting. Though the rule was set aside by courts, the rule exists now in the form of exchange rule making in the US. The European Union too has a different restriction on such DVRs.

The absence of yesterday's rule would create a situation bordering on fraud if not oppressive.

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