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SR equity shares

Also written Superior voting rights equity shares · SR shares

Superior voting right equity shares issued to promoter-founders of a technology-intensive company — same face value and economics as ordinary shares, but 2 to 10 votes per share.

In plain language

A founder building a technology company often needs several rounds of outside capital before an IPO. Each round dilutes the founder's stake, and by listing time the founder may own too little to keep control of the strategy that made the company valuable.

SR (superior voting right) equity shares separate the two things an ordinary share bundles together — economic ownership and votes. An SR share has the same face value and is equivalent to an ordinary share in all respects except voting, where it carries more votes. The ICDR Regulations allow an issuer with SR shares to list its ordinary shares on the Main Board, but only under a tight set of conditions designed to stop the device being used by anyone other than a genuine founder-led technology company.

How it works

Conditions for an IPO by an issuer with SR shares (Regulation 6(3), Chapter 5). The IPO may be of ordinary shares only, and:

  1. the issuer must be intensive in the use of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology to provide products, services or business platforms with substantial value addition;
  2. the net worth of the SR shareholder, as determined by a registered valuer, must be not more than Rs 1,000 crore — counting investments in other listed companies but not the shareholding in the issuer;
  3. the SR shares were issued only to promoters/founders holding an executive position in the issuer;
  4. they were authorised by a special resolution at a general meeting whose notice specified the size of the issue, the voting ratio, any differential dividend rights, sunset provisions, and the matters on which SR shares vote on par with ordinary shares;
  5. they were issued before the draft red herring prospectus was filed and held for at least three months before the red herring prospectus was filed;
  6. voting rights are in a ratio of minimum 2:1 up to maximum 10:1, in whole numbers only;
  7. same face value as ordinary shares;
  8. only one class of SR shares;
  9. equivalent to ordinary shares in all respects except superior voting rights.

After listing (Chapter 6).

  • Lock-in: SR shares are locked in until conversion into ordinary voting shares, or for the regular promoter lock-in period, whichever is later.
  • No pledge: locked-in promoter shares may be pledged to specified lenders — except SR equity shares.
  • No transfer: locked-in promoter shares may move to another promoter or promoter group member — except SR equity shares.
  • Shareholders holding SR shares must have them in dematerialised form before the draft offer document is filed.

Takeovers (Chapter 7). An increase in a shareholder's voting rights beyond the SAST thresholds, without acquisition of control, that results from conversion of SR shares into ordinary shares is exempt from the open-offer obligation.

A worked example

Illustrative figures. Arjun Rao, founder-CEO of a data-analytics company, holds 50 lakh SR shares carrying 10 votes each. After the IPO, ordinary shareholders hold 4 crore shares.

Total shares           = 4.0 crore + 0.5 crore        = 4.5 crore
Arjun's economic stake = 0.5 ÷ 4.5                    = 11.1%

Total votes            = 4.0 crore + (0.5 crore × 10) = 9.0 crore
Arjun's voting power   = 5.0 ÷ 9.0                    = 55.6%

An 11.1% owner controls 55.6% of the votes.

Does he pass the net worth test?

AssetValueCounted?
Shares in other listed companiesRs 640 croreYes
Other assetsRs 300 croreYes
Stake in the issuer itselfRs 2,000 croreNo — excluded
Net worth for the testRs 940 crore≤ Rs 1,000 crore → passes

Design checks the lead manager runs.

  • A proposed ratio of 2.5:1 fails — the ratio must be a whole number.
  • A second class of SR shares with 5:1 for a co-founder fails — only one class is permitted.
  • SR shares allotted seven weeks before the RHP is filed fail the three-month holding condition.
  • A bank asks Arjun to pledge his SR shares against a personal loan — not permitted while locked in.

Why NISM asks about it

Chapter 5 (Issue Management – Process and Underwriting), the heaviest chapter at 18%, sets out the SR share conditions inside the IPO eligibility rules; Chapter 6 carries the lock-in, pledge and transfer restrictions; Chapter 7 the takeover exemption on conversion.

The numbers — Rs 1,000 crore, 2:1 to 10:1 in whole numbers, three months, one class — are compact, closed facts of the kind that turn into single-mark questions.

Common exam traps

  • The IPO is of ordinary shares. SR shares are not offered to the public.
  • Net worth is capped at Rs 1,000 crore — a ceiling, not a floor — and the stake in the issuer is excluded while other listed holdings are included.
  • Minimum 2:1, maximum 10:1, whole numbers. 1.5:1 and 12:1 both fail; so does 2.5:1.
  • Only promoters/founders in an executive position may hold them.
  • Three months before the RHP, not before the DRHP — though they must be issued before the DRHP.
  • Same face value, same everything except votes — including dividends, unless the special resolution specified differential dividend rights.
  • Lock-in is until conversion or the regular period, whichever is later — and SR shares can be neither pledged nor transferred within the promoter group while locked in.

Check yourself

  1. 1.Which of the following is NOT a condition for an issuer with SR equity shares to make an IPO of ordinary shares on the Main Board?

    1. a)The issuer is intensive in the use of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology
    2. b)The issuer may keep up to two classes of SR equity shares with different voting ratios
    3. c)The SR shares were issued only to promoters or founders who hold an executive position in the issuer
    4. d)The net worth of the SR shareholder, as determined by a Registered Valuer, is not more than ₹1,000 crore
    Show the answer

    Answer: (b) The issuer may keep up to two classes of SR equity shares with different voting ratios

    The rule is the opposite: only one class of SR shares is allowed. The workbook states the issuer shall only have one class of SR equity shares.

    The other three are genuine conditions:

    • Technology intensity — the issuer shall be intensive in the use of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology to provide products, services or business platforms with substantial value addition.
    • Executive founders — the SR shares were issued only to the promoters/ founders who hold an executive position in the issuer company.
    • Net worth cap — the net worth of the SR shareholder, as determined by a Registered Valuer, shall not be more than rupees one thousand crore. In computing it, his investment/ shareholding in other listed companies shall be considered but not that of his shareholding in the issuer company.

  2. 2.Under Regulation 7 of the SEBI ICDR Regulations, by when must the specified securities held by the promoters, selling shareholders, directors, key managerial personnel and senior management of an IPO-bound issuer be in dematerialised form?

    1. a)Prior to the filing of the draft offer document
    2. b)Prior to the filing of the red herring prospectus with the Registrar of Companies
    3. c)Before the issue opens for subscription
    4. d)Before the application for listing is made after allotment
    Show the answer

    Answer: (a) Prior to the filing of the draft offer document

    Before the draft offer document is filed. Regulation 7(1)(c) requires that all its specified securities held by the promoters, the promoter group, the selling shareholder(s), the directors, the key managerial personnel, the senior management, qualified institutional buyer(s), employees, shareholders holding SR equity shares, entities regulated by Financial Sector Regulators and any other category SEBI specifies are in the dematerialised form prior to the filing of the draft offer document.

    • RHP filing and issue opening are later milestones; waiting until then would breach the rule, because the condition bites at the DRHP stage.
    • Listing application — far too late; the demat condition is a pre-filing eligibility test.

    For this clause, an employee means a person designated as an employee by the issuer, who is exclusively working in India, and employees of its holding, subsidiary or associate company.

  3. 3.An IPO issuer will use the majority of the issue proceeds, excluding the offer for sale portion, for capital expenditure. What lock-in applies to the promoters' holdings?

    1. a)Eighteen months on the minimum contribution and six months on the excess
    2. b)Three years on the minimum promoters' contribution and one year on the holding in excess of it
    3. c)Six months on everything
    4. d)No lock-in, because the proceeds fund a project
    Show the answer

    Answer: (b) Three years on the minimum promoters' contribution and one year on the holding in excess of it

    Minimum promoters' contribution... shall be locked-in for a period of eighteen months from the date of allotment in the initial public offer, Provided that in case the majority of the issue proceeds excluding the portion of offer for sale is proposed to be utilized for capital expenditure, then the lock-in period shall be three years from the date of allotment.

    Promoters' holding in excess of the minimum promoters' contribution shall be locked in for a period of six months. Provided that in case the majority of the issue proceeds, excluding the portion of an offer for sale, is proposed to be utilized for capital expenditure, then the lock-in period shall be one year from the date of allotment.

    So option A gives the ordinary case; the capital expenditure proviso doubles both periods and more.

    Capital expenditure is defined broadly: it shall include civil work, miscellaneous fixed assets, purchase of land, building and plant and machinery, etc. and repayment of existing loan(s) that may have been taken for the purpose of such capital expenditure.

    Note the exclusion of the offer for sale portion from the majority test — only money actually reaching the company counts.

    The eighteen-month (here three-year) lock-in covers more than the promoters. It applies to minimum promoters' contribution including contribution made by alternative investment funds or foreign venture capital investors or scheduled commercial banks or public financial institutions or insurance companies registered with... IRDAI (or any non-individual public shareholder holding at least five per cent. of the post-issue capital or any entity (individual or non-individual) forming part of promoter group other than the promoter(s)).

    Everyone else has six months regardless: the entire pre-issue capital held by persons other than the promoters shall be locked-in for a period of six months from the date of allotment — excepting employee scheme shares, ESOP trust shares, and Category I or II AIF, VCF and FVCI holdings, the last locked in for a period of at least six months from the date of purchase.

    And SR equity shares are locked in until conversion or the stated period, whichever is later.

Where this is taught

Free preparation for NISM Series IX

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