The Securities and Exchange Board of India has brought about a significant change in the Securities Contract Regulations Rule, 1957. The change is geared towards the interests of start-ups and shall prove to be very inviting for investors, VC’s and the likes.
While the investors could have easy exit on their investments before, investors were seldom baffled by the valuations and fear of losing massive value on their investment, by the time they’d exit that particular company. This new amendment though, may very well prove to be a sigh of relief.
The major amendment is two fold. Let’s first take a look at the law:
(A) In the Securities Contracts (Regulation) Rules, 1957, under rule 19, sub-rule (2), clause (b), after the second proviso, the following proviso shall be inserted, namely:—
“Provided also that the applicant company, who has issued equity shares having superior voting rights to its promoters or founders and is seeking listing of its ordinary shares for offering to the public under this rule and the regulations made by the Securities and Exchange Board of India in this regard, shall mandatorily list its equity shares having superior voting rights at the same recognized stock exchange along with the ordinary shares being offered to the public”
(B) after sub-rule (7), the following sub-rule (8) shall be inserted, namely :-
―(8) Notwithstanding anything contained in this rule, the minimum offer and allotment requirements as prescribed under clause (b) of sub-rule (2) shall not be applicable to the listing of such equity shares having superior voting rights issued to the promoters or founders as the case may be, in cases where the applicant company is seeking listing of its ordinary shares for offering to the public in accordance with the provisions of this rule and the regulations made by the Securities and Exchange Board of India in this regard.
A simple translation of the above amendment provides that the investors, promoters, VC’s and Private Equity funds who had superior voting rights attached to their shares can now generate liquidity with their shares by being able to list these securities. In fact, any company looking to list its ordinary shares with the public under these rules, is now mandatorily required to list these superior voting right shares in the same recognized stock exchange along with the ordinary shares being offered to the public.
But, these superior voting right shares will not be covered under the minimum public shareholding rules as prescribed under clause (b) of sub-rule (2) of the said rules hence, the listing is based upon the willingness of the investors. This is exactly the kind of shareholding adopted by various conglomerates like Alibaba, Facebook, Google and the likes.