REINTRODUCING DUAL-CLASS SHARES TO INDIA

Abstract

The legal framework associated with the issue of dual-class shares in India prohibits public listed companies from issuing shares with superior rights as to voting and dividends. Although the Companies Act was amended in 2000 to permit the issue of dual-class shares, concerns regarding the interests of investors compelled SEBI to significantly narrow down the scope of issue of shares with differential rights, in 2009, to the point of economic unviability. Earlier this year, SEBI released a consultation paper proposing a new framework for the issue of dual-class shares, that broadens the scope of the 2009 amendments to allow the issuance of such shares in limited cases. In light of the proposed framework, it is necessary to review the detrimental impact that the issue of shares with differential voting rights may have on corporate governance and decision-making, as well as, highlight the benefits accruing to certain companies by virtue of such shares. The author argues, that blanket permission for all public listed companies to issue shares with differential voting rights or dividend payments would serve as a striking departure from the standards of corporate governance that have become the norm in Indian corporate law. By examining the operations of companies in jurisdictions that permit the issue of dual-class shares, the author shows that shares with differential rights compromise the interests of minority shareholders and lead to corporate mismanagement, by separating voting rights from economic interest and consolidating decision-making power in the hands of the company’s promoters and management personnel. However, the author also contends that the issue of dual-class shares can be beneficial for companies at their early-stages, a blanket ban would be counter-effective to the incentives provided for the creation of start-ups. The author further argues that SEBI’s proposed framework for the issuance of dual-class shares reaches the right balance between corporate governance and protecting the interests of promoters.