2014

A Study
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1. Introduction ........................................................................................................................................ 2
2. Buyback of Shares: .............................................................................................................................. 3
3. Differential Voting Rights: ................................................................................................................... 5
Global Scenario: .................................................................................................................................. 5
Indian Scenario: .................................................................................................................................. 5
Issue of DVRs by Tata Motors ............................................................................................................. 7
Changes made by SEBI ........................................................................................................................ 7
Advantages of issue of DVRs: .............................................................................................................. 8
Disadvantages of issue of DVRs: ......................................................................................................... 8
4. Conclusion ........................................................................................................................................... 9
5. Reference ............................................................................................................................................ 9









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1. Introduction
Shareholding pattern has assumed great significance in the modern era with a number of
instrumental changes happening in the way issuing of shares is being done.

Company being a separate legal entity is characterized by separation of management from
the ownership.
1
The line of strict distinction between ownership and control has blurred
over the years and the shareholder has been gradually reduced from an owner in the
company to someone who is merely entitled to profits, i.e., dividends and other
consequential benefits. The right to vote is an inherent right of the shareholders which
signifies their overall supervisory powers and ultimately, control over the actions of the
company. It helps them steer the management to act in the interest of the company. In
India, the Companies Act, 1956 classifies shares into two kinds: equity and preference
shares. Every member of a company limited by shares and holding any equity share capital
shall have a right to vote.
2
This is proportionate to the number of shares held. But the
concept of One- share, one-vote slowly began to undergo dilution with the management
wanting more control to ward off hostile takeovers, which were becoming recurrent. The
era of globalisation and privatisation led us into an era of sweeping changes like never
before. The urge to retain control demanded innovative ways of handling issue of shares.

Keeping this objective in mind, an Expert study on establishment of New Stock Exchange
was set up in 1991 under the chairmanship of Mr. M.J. Phewani. The Committee proposed
that the dividend-paying companies having a track-record of dividend payments in the
preceding two years and/or in four out of five years or five out of seven years can issue
non- voting shares (hereinafter referred to as NVS) i.e., certain shares without the
incidental right to vote.
3

The provision for NVS found its place in the Companies Bill 1993 and 1997
4
with the
condition that such shares shall not exceed 25% of the issued share capital with voting
rights.
5
This was also made subject to terms and conditions prescribed by the Central
Government from time to time. But these bills could not see the light of the day.

Unsuccessful attempts at enacting a new Companies Act forced the government to
amend the existing Companies Act, 1956 to incorporate the concept of Differential Voting
rights (hereinafter referred to as DVRs). S. 2(46) A provides that shares may be issued with
DVRs in accordance with the provisions of s.86. The Companies Act Amendment of 2000
altered the s. 86 to now add a new class of equity shares which may be issued with
differential rights as to dividend, voting or otherwise in accordance with such rules and
subject to such conditions as may be prescribed.


1
Solomon v. Solomon & Co Ltd, [1895-99] All ER 33 (HL)
2
Section 87, Companies Act, 1956
3
Roy, Souvik & Kumar, Akarshan, Differential Voting Rights:A Necessity or A Burden,
<http://www.taxmann.com/datafolder/Flash/flashart6-8-09_5.pdf>
4
Mukherjee, Arindam, No act of Corporate Democracy, Outlook India Online, September 1, 1997, <
http://www.outlookindia.com/article.aspx?204143>, (Last visited on September 14, 2009)
5
Shares minus voting, The Hindu Financial Daily, January 11, 2001,
<http://www.hindu.com/businessline/2001/01/11/stories/041118mo.htm>, (Last visited on 14
th
September,
2009)
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The inclusion of the aforementioned shares with DVRs meant that s. 88 which prohibited
the issue of shares with disproportionate rights had to be repealed.
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To give effect to the
new provision of 86(a) (ii), the Department of Company Affairs came up with the
Companies (Issue of Share Capital with DVRs) Rules, 2001
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. These rules govern the issue of
shares with DVRs and Rule 3 lays down the pre-conditions as well as the duties of a
company seeking to issue such shares. The rule lays down that the total number of shares
with DVRS cannot be more than 25 percent of the issued share capital.
2. Buyback of Shares:
The Securities and Exchange Board of India [SEBI] has issued SEBI (Buy back of Securities)
Amendment Regulations, 2013 [hereinafter referred to as "New Regulations"] vide
notification No. LAD-NRO/GN/2013- 14/16/6348 dated 8th August, 2013 amending the
existing SEBI (Buy back of Securities) Regulations, 1998 [hereinafter referred to as
"Regulations"/ "Old/Earlier Regulations"].
The changes have been discussed point wise as follows:
1. Ceiling prescribed for buy back from open market: The existing regulations do not
prescribes any cap on the amount on buy back of securities. However, with the issue
of new regulations, a provision has been added to Regulation 4 which provides that
buy-back offer from the open market shall not be made for 15% or more of the paid
up capital and free reserves of the company. In this regard, clause 68 of the
Companies Bill, recently approved by Rajya Sabha provides that the buy-back of
securities shall be limited to 25% of total paid-up capital and free reserves. Provided
that in case of buy-back of equity shares it is 25% of total paid-up equity capital in a
financial year.
2. Lock in period on further buy-back : The existing regulations do not provide for any
lock in period between two buy back offers. However, the new regulations has
issued a sub-regulation 4 after sub-regulation 3 of Regulation 4 which provides that
no offer of buy-back shall be made by any company within a period of one year from
the date of closure of the preceding offer of buy back. The Companies Bill in this
regards also provides that no offer of buy-back shall be made within a period of one
year from the date of closure of preceding offer of buy-back.
3. Minimum Buy Back limit: The newly introduced sub regulation 3 of Regulation 14 of
the new regulations provides that at least 50% of the amount set aside for buy-back
shall be utilized for buying back shares or other specified securities. There was no
such limit prescribed in the existing regulations. Further, the Companies Bill is also
silent with respect to such limit.
4. Public Announcement (PA): Regulation 15(d) of the said regulations provided that
the PA shall be made at least 7 days prior to the commencement of buy back.
5. However, the new regulation has modified the said regulation and provides that the
PA shall be made within 7 working days from the date of passing the resolution
authorizing buy-back. It is to be noted that there is no such condition relating to the
same has been provided in the Companies Bill.
6
Vide the Companies (Amendment ) Act, 2000 (53 of 2000)
7
Notification SO 167(E) dated 09-03-2001
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6. Filing of copy of PA with SEBI: The regulations provided that copy of PA shall be filed
with SEBI within 2 days of making such announcement. The same has now been
modified and the companies shall now be required to ensure that copy of PA shall be
filed with SEBI simultaneous with the issue of public announcement.
7. Submission of information pertaining to buy-back : Regulation 15(i) in the
regulations provided that the company shall submit the information pertaining to
buy-back on daily basis to Stock Exchange and publish the same in a national daily on
a fortnightly basis. However, as per the amended regulation (i) of Regulation 15, the
company shall be required to submit the information regarding the shares or
securities bought back to stock exchange on daily basis in specified form and the
stock exchange shall upload the same on its website. Further, newly inserted sub
regulation (ia) of Regulation 15 provides that the company shall upload the
information regarding the shares or other securities bought-back on its website on a
daily basis.
8. Period of buy back offer: The newly inserted sub regulation (k) of Regulation 15
provides that the buy-back offer shall open not later than seven working days from
the date of public announcement and shall close within six months. No such
condition was prescribed under the existing regulations. However, the Companies
Bill provides that the buy-back shall be required to be completed within a period of 1
year from the date of passing of resolution authorizing buyback.
9. Buying back physical shares/ specified securities: Regulation 15A has been inserted
in the new regulation which deals with buy-back of physical shares or other specified
securities. Following are some of the key points:
i. a separate window shall be created by the stock exchange, which shall
remain open during the buy-back period, for buyback of shares or other
specified securities in physical form.
ii. Before proceeding with buy-back, verification of the identity proof and
address proof needs to undertaken by the broker.
iii. the price at which the shares will be bought back shall be the volume
weighted average price of the shares or other specified securities bought-
back, other than in the physical form, during the calendar week in which such
shares or other specified securities were received by the broker
No such conditions were prescribed in the earlier regulations. Neither there is any
provision relating to same in the Companies Bill.
10. Escrow Account: New Regulation 15B has been inserted which provides that before
opening of the buy-back offer, the company shall create an escrow account towards
security and shall deposit 25 % of the amount earmarked for the buy-back in such
escrow account. No such condition was/is there either in the regulations or
Companies Bill.
11. Extinguishment of Certificates: The newly inserted sub regulation 3 of Regulation 16
provides that the company shall be required to extinguish and physically destroy the
security certificates so bought back during the month in the presence of a Merchant
Banker and the Statutory Auditor, on or before 15th day of the succeeding month.
Further, the company shall ensure that all the securities bought-back are
extinguished within seven days of the last date of completion of buyback. Earlier
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there was no such provision under the regulations. The Companies Bill however,
provides that the certificates shall be extinguished within 7 days of the last date of
completion of buy-back.
12. Restriction on dealing in Shares or specified securities: Regulation 19(1)(e) has been
modified so as to specifically mention the period during which the promoters or the
person shall be restricted to deal in shares or specified securities. As per the said
regulation, the promoter or the person shall not be allowed to deal in the shares or
other specified securities of the company in the stock exchange during the period or
off- market, including inter-se transfer of shares among the promoters during the
period from the date of passing the resolution relating to buyback. As per the earlier
regulations, such restriction was for during the period when buy back offer is open.
No such condition as prescribed in the Companies Bill.
13. Raising of further capital: As per the newly inserted Regulation 19(1)(f ), the
company shall not raise further capital for a period of 1 year from the closure of buy-
back offer, except in discharge of its subsisting obligations. However, as per the
Companies Bill, a period of 6 months has be prescribed for the purpose of raising
further capital except by way of bonus issue or in discharge of its subsisting
obligation.
3. Differential Voting Rights:
Shares with Differential Voting Rights (DVRs) means shares that give the holder differential
rights as to voting (either more or less voting right) as against the Ordinary shareholders of
the company.
Shareholders being the owners of a company have a right to vote and thereby participate in
the Management of a company. In India where most of the businesses are family owned,
voting rights represent the only means by which an alignment of interest between the
owners (promoters) and shareholders can be effected.
The issue of DVRs can result in two types of shares:
1) Shares that have superior voting rights.
2) Shares that have inferior voting rights but offer higher dividends or are offered at
a discount.
Global Scenario:
World over the concept of one share one vote is followed. However, DVRs also called Dual
Class shares also started gaining popularity. Globally there are big names like Google, Ford
etc. that issued DVRs. Many exchanges like the Singapore Stock Exchange dont allow the
issue and listing of DVRs. Many Studies conducted in USA have shown that the Agency Cost
tends to be higher in case of Dual Class of shares over the Ordinary shares.
Indian Scenario:
The use of shares with DVRS to exercise control has already begun in India. In Anand
Pershad Jaiswal and Ors v. Jagatjit Industries Ltd. and Orsthe first case of its kind, before
Company Law Board, the promoters were issued shares with 20 voting rights per share
which enabled them to exercise complete control over the company.
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The preferential allotment of new shares with superior voting rights had increased
their voting rights to around 64% though the economic stake increased merely by a little
more than 8 percent from 23.59% to around 32%. This was initially challenged before
SEBI by the rival groups contending foul play in pricing of shares and the fact that
approval for the same was not acquired from the stock exchanges. SEBI found itself
incompetent to decide the matter citing the fact that Section 86 of the Companies Act
does not come under Section 55A which enumerates the powers exercisable by SEBI on
companies.

The petitioners then moved the Company Law Board praying for
declaration of the resolution approving such differential voting rights as bad in law and
hence null and void. The contention was negated by the CLB. The issue of shares with DVRs
was upheld as valid as being in accordance with the Articles of Association of the Company
and provisions of the Companies Act. The Company was directed to buyback the entire
shareholding of the two petitioner groups for a total consideration of Rs. 36, 50, 00,000/-
to be paid to each Group. The said shares were ordered to be converted into physical form
and tendered to the Company for buy back as a consequence thereof the share capital of
the company stood reduced and the Company was exempted from compliance under
Section 100 of the Companies Act, 1956. The CLB also observed that since the shares were
being bought back by the Company from the existing promoters as part of a settlement
between them, in the circumstances, the parties were exempted from complying with the
provisions of Section 77A, the provisions of SEBI (Buyback of Securities) Regulations, 1988,
SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997 and any other
applicable Regulations and provisions of the Companies Act.
These conditions are:
Every company limited by shares may issue shares with differential rights as to dividend,
voting or otherwise, if-
1. The company has distributable profits in terms of Section 205 of the Companies
Act, 1956 for three financial years preceding the year in which it was decided to issue
such shares.
2. The company has not defaulted in filing annual accounts and annual returns for
three financial years immediately preceding the financial year in which it was
decided to issue such share.
3. The company has not failed to repay its deposits or interest thereon on due date
or redeem its debentures on due date or pay dividend.
4. The Articles of Association of the company authorizes the issue of shares with
differential voting rights.
5. The company has not been convicted of any offence arising under, Securities
Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956,
Foreign Exchange Management Act, 1999.
6. The company has not defaulted in meeting investors grievances.
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7. The company has obtained the approval of share holders in General Meeting by
passing resolution as required under the provision of sub-clause (a) of sub-section (1)
of section 94 read with sub-section (2) of the said section.
8. The listed public company obtained approval of share holders through Postal
Ballot.
9. The notice of the meeting at which resolution is proposed to be passed is
accompanied by an explanatory statement stating
a. The rate of voting rights which the equity share capital with differential
voting right shall carry;
b. The scale or in proportion to which the voting rights of such class or type of
shares will vary;
c. The company shall not convert its equity capital with voting rights into
equity share capital with differential voting rights and the shares with
differential voting rights into equity share capital with voting rights;
d. The shares with differential voting rights shall not exceed 25% of the total
share capital issued;
e. That a member of the company holding any equity share with differential
voting rights shall be entitled to bonus shares, right shares of the same class;
f. The holders of the equity shares with differential voting rights shall enjoy
all others rights to which the holder is entitled to excepting right to vote as
indicated in (a) above.
Issue of DVRs by Tata Motors
With DVRs issue allowed in India since 2000, it was almost 8 years after it that Tata Motors
became the first company to issue DVRs in India. To fund the Jaguar - Land Rover
acquisition, in November 2008, Tata Motors issued 6.4 crores DVRs (A Ordinary Shares)
priced at Rs. 305 per share as against Rs. 340 for an ordinary share and offered higher
dividend on these shares. These shares has 1/10th voting rights. Due to lack of awareness
amongst the investors about such shares, these DVRs reported very low trading volumes.
Issue of DVRs by Pantaloons Following Tata Motors issue, in February 2009, Pantaloons
issued bonus shares which were DVRs. These class B shares also had 1/10th voting rights to
the existing ordinary shares. These shares offered 5% additional dividend. The trading
volume in these shares was significant due to the reason that they were offered as bonus
shares and not fresh issues.
Changes made by SEBI
In 2009, Anand Pershad Jaiswal and Ors v. Jagatjit Industries Ltd. and Ors resulted in a
significant debate over DVRs. In this case, the promoters of Jagatjit Industries Ltd. had
issued with 20 voting rights per share. This resulted in an increase of voting rights to 62% for
the promoters who held only 32% of economic stake in the company. The minority
shareholders Anand Jaiswal and Jagatjit Jaiswal, who together owned 12% filled a petition
with CLB. The CLB upheld the issue of DVRs as it had met all the regulatory requirements.
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Following this judgment there were a lot of voices raised on the misuse of DVRs with
superior voting rights by the management to get full control on the company to the
deterrent of the minority stakeholders. Following this, SEBI came up with letter dated July
21, 2009 addressed to all stock exchanges which prohibited issue of DVRs with superior
rights as to dividend or voting. So now an issue of the likes of Tata Motors or Pantaloons
with higher dividends with lower voting rights is not possible. However, as these issues by
Tata Motors were made before the amendments, SEBI has allowed issue of DVRs as bonus
shares or rights issue to existing DVR holders of Tata Motors. The above informal guidance
to Tata Motors (issued in April 2010) also allowed it to issue fresh DVRs with same terms by
FPO issue, preferential allotment and QIPs and issue of ESOPs convertible into DVRs.
Advantages of issue of DVRs:
To Company:
1) A company historically would want to issue DVRs to raise more capital without
diluting its ownership structure.
2) Also, DVRs have been used as a tool to avoid a hostile takeover.
3) Sometimes shares with DVRs may be issued as a means of price discovery.
To Investors:
1) Investors benefit from a DVR issue as they are offered at a price discount.
2) Investors stand to benefit when the price differential between the Ordinary share
and DVRs reduces.
3) Also, DVRs come with higher dividend as compared to ordinary shares.
4) It is beneficial for the passive investors who are not interested in company
management and look for higher dividends and discounts.
Disadvantages of issue of DVRs:
To Company:
1) Issue of can sometimes result in a tarnished image of the company.
2) It can ward off institutional investors as they have restrictive clauses in there by
laws which prohibit investment in such instruments.
3) With lack of investor awareness about such issues, they tend to be illiquid.
To Investors:
1) Not beneficial for Institutional Investors as they are more interested in long term
capital gains.
2) Lack of transparency as to the pricing of such instruments.
3) Lack of liquidity may hamper returns.
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4) Results in avoidance of takeovers that might have been in the interest of the
shareholders.
5) Makes management excessively powerful and insulate managers from
accountability, since DVRs reduces shareholders right of challenging the
management.
4. Conclusion

The Securities and Exchange Board of India (SEBI) has simplified rules for foreign investors
and tightened the norms for buyback of shares by the companies. While tightening the
norms for companies to buy back shares, the SEBI has said that 50 per cent of the
earmarked funds for a buyback have to be utilised by the corporates as against the existing
stipulation of 25 per cent.
The issue of shares with differential voting rights has not been used a great deal by the
Indian companies. Moreover, it has not attracted the investors so much, one of the prime
reasons being lack of awareness about these instruments. Though these shares are a great
means to raise capital without much dilution of control, more often than not, these
instruments are used by the promoters of the company to have an absolute control over the
management of the company by issuing these shares. They tend to misuse their position,
thus resulting in loss to ordinary shareholders.
5. Reference

1. http://www.sebi.gov.in/faq/buybackfaq.html
2. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1375961931576.pdf
3. www.sebi.gov.inboardmeetingsswdr.pdf
4. www.taxmann.comdatafolderewsChapterV.pdf
5. www.mca.gov.inMinistrypdfCARulesChapter.pdf
6. www.tatamotors.com/pdf/A-Ordinary-Shares.pdf
7. www.jains.comDFTermsofDVR.pdf
8. www.icsi.eduportals6.pdf
9. http://www.livemint.com/Money/HEFEWAVtygrSBMOMBVjHiM/Dejargoned-
Differential-voting-rights-shares.html