Superior Voting Rights Shares: How SR Shares Let Founders Keep Control After an IPO

Picture a founder who has sold most of her company to venture funds over a decade of fundraising, and now wants to list it without handing the steering wheel to whoever ends up with the most shares. That is the problem superior voting rights shares are meant to solve. SR shares carry more than one vote each, so a founder can own a small slice of the economics and still carry the vote on most resolutions. India has allowed tech companies to list with this structure since 2019, under rules SEBI has tightened and loosened since.

This guide walks through who can issue SR shares, what the voting ratio limits are, the safeguards that kick in for minority shareholders, how and when the shares convert, and a worked example in plain numbers. If you are new to offer documents, our pillar guide on IPO investing in India is a good place to start.

What superior voting rights shares actually are

An SR share is an equity share that gives its holder more votes than an ordinary share. Everything else stays the same. Under Regulation 6(3) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as summarised by the law firm Khaitan & Co, SR shares must have the same face value as ordinary shares, there can be only one class of them, and they must be equivalent to ordinary shares in all respects except the extra votes. That includes dividends. A founder holding SR shares does not get a bigger dividend per share than you do.

SEBI’s own reasoning is set out in its October 2021 board memorandum reviewing the framework. New-age tech firms tend to be asset light, they raise money repeatedly by diluting the founders, and the founders are often central to why the business works. SR shares were meant to let those founders keep decision-making power relative to financial investors who mostly care about returns.

One point worth getting straight early: in this framework, the company lists its ordinary shares. The SR shares stay with the founders and are not offered to the public in the IPO.

Who is allowed to issue them

This is not open to every company that fancies a dual-class structure. The eligibility conditions, per the Khaitan note and SEBI’s later amendment, are roughly these:

• Tech-intensive business. The company must make intensive 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 only. SR shares can be issued only to promoters or founders who hold an executive position in the company. SEBI considered letting family trusts and holding companies hold them, and the October 2021 memo records that it decided to keep the individuals-only rule.
• A net worth ceiling. Originally, an SR shareholder could not be part of a promoter group with a collective net worth above Rs 500 crore. The ICDR (Fourth Amendment) Regulations, 2021, notified on 26 October 2021, replaced this with an individual test: the SR shareholder’s own net worth, determined by a registered valuer, must not exceed Rs 1,000 crore. Holdings in other listed companies count towards that figure; the stake in the issuer itself does not.
• Timing. The same 2021 amendment says SR shares must be issued before the draft red herring prospectus is filed and held for at least three months before the red herring prospectus is filed. The earlier rule required a six-month holding period before the RHP.
• Shareholder approval. The issue of SR shares needs a special resolution at a general meeting, and the notice has to spell out the size of the issue, the voting ratio, any differential dividend rights, the sunset terms and the matters on which SR shares vote like ordinary shares.

Why did SEBI loosen the net worth and timing conditions? The 2021 memo is candid about it. Issuers had not used the framework at all, and market participants told SEBI these two conditions in particular were cumbersome. On timing, the memo notes that tech companies usually restructure their capital, converting convertibles and doing bonus issues or splits, close to the IPO, so a six-month gap was hard to meet.

SR shares buy a founder time and control, not a bigger share of the profits. The dividend on an SR share is the same as yours.

The voting ratio and the 74% cap

The extra votes are bounded. SR shares must carry between 2 and 10 votes for every vote on an ordinary share, and the ratio has to be a whole number. So 3:1 is fine, 10:1 is fine, 2.5:1 is not, and 15:1 is out.

There is a second limit that matters more in practice. Under the listing rules SEBI amended at the same time, Khaitan’s summary notes that shareholders of SR shares can hold at most 74% of total voting rights, counting their ordinary shares too. Put simply, however large the founder’s holding, more than a quarter of the votes always sits with other shareholders. In the worked example further down, you will see this ceiling bite.

Coat-tail provisions: where one share goes back to one vote

The safeguard most investors should care about is the list of resolutions on which an SR share counts as just one vote. SEBI’s memo calls these coat-tail provisions. According to the Khaitan summary, they cover:

• appointing or removing an independent director or the statutory auditor;
• the promoter voluntarily transferring control to another entity;
• related party transactions involving an SR shareholder;
• voluntary winding up;
• changes to the company’s charter documents, other than changes affecting SR shares;
• starting a voluntary resolution process under the Insolvency and Bankruptcy Code;
• using funds for purposes outside the ordinary course of business;
• substantial value transactions above the materiality threshold in the listing rules;
• approving a delisting or buyback by special resolution; and
• any other matter SEBI notifies.

Look at what that list protects. The founder cannot use extra votes to pick the people who are supposed to watch the founder (independent directors and auditors), cannot approve deals with herself, and cannot sell control or delist the company on the back of super-votes. On day-to-day strategy and most ordinary resolutions, though, the extra votes work in full.

Tighter boards for SR companies

Listed companies with SR shares also carry heavier governance requirements. The Khaitan note sets them out against the normal rules:

• At least half the board must be independent directors.
• The audit committee must consist entirely of independent directors.
• The nomination and remuneration committee, the stakeholders relationship committee and the risk management committee each need at least two-thirds independent directors.

For an investor, these are the checks to look for in the RHP’s corporate governance section. If an SR company’s board barely clears the bar, that tells you something.

Lock-in, rights and bonus issues

SR shares count towards the 20% minimum promoter contribution. Khaitan’s note on the 2019 rules says they stay locked in until they convert into ordinary shares or until the applicable promoter lock-in period ends, whichever is later. Our explainer on the IPO lock-in period covers the general promoter rules. During the lock-in, SR shares cannot be transferred even among promoters.

Two smaller rules close obvious loopholes. SR holders cannot renounce their entitlement in a rights issue, and SR shares received in a rights issue stay locked in until they convert with the rest. A bonus issue on SR shares produces bonus shares with ordinary voting rights, which also convert along with the existing SR shares. So a founder cannot quietly multiply super-votes through corporate actions.

The sunset: when SR shares become ordinary shares

None of this is permanent. Per the Khaitan summary, SR shares must convert into ordinary shares within five years of the ordinary shares listing. That period can be extended once, by up to five more years, through a resolution passed by the non-SR shareholders. The SR holders cannot vote on their own extension. SEBI’s 2021 memo describes the benefit the same way: temporary, with a maximum validity of five years from listing, extendable by another five with shareholder approval.

Conversion also happens automatically, before the sunset, if:

• the promoter dies or resigns;
• a merger or acquisition shifts control away from the SR shareholders; or
• the SR shares are sold after the lock-in ends but before their validity runs out.

The logic is tidy. The extra votes are tied to a specific person running the company. When that person leaves, sells or loses control, the votes go back to normal. Khaitan also notes that if conversion pushes a shareholder’s voting rights above the takeover thresholds, the open offer requirement is waived, as long as the increase does not come with an acquisition of control.

The super-votes are tied to the founder running the company. Resign, sell or lose control, and they quietly turn back into one vote per share.

Worked example: how SR shares change the vote count

Let us make this concrete with a hypothetical company. Call it Company Z, a software firm that meets the tech-intensive test. The numbers below are invented for illustration only.

After its IPO, Company Z has 10 crore shares in total. The founder holds 1 crore SR shares at a 10:1 ratio. Everyone else, including VCs, mutual funds and retail investors, holds the remaining 9 crore ordinary shares.

The founder’s 10 crore votes out of 19 crore works out to 52.6%. With a tenth of the company, she carries any ordinary resolution where everyone votes. That is the whole point of the structure.

Now take a coat-tail vote, say removing an independent director. Here each SR share counts as one vote. The founder has 1 crore votes out of 10 crore, which is 10%. Her influence drops to exactly her economic stake.

Next, test the 74% cap. Suppose instead the founder held 2.5 crore SR shares (25% of the company) at 10:1, with 7.5 crore ordinary shares elsewhere. Her votes would be 25 crore out of 32.5 crore, or about 76.9%. That breaches the 74% ceiling, so a structure like this would have to use a lower voting ratio or a smaller SR holding. At 2 crore SR shares (20%) and 10:1, the figure is 20 crore out of 28 crore, about 71.4%, which sits under the cap.

Finally, the sunset. If the founder resigns in year three, her SR shares convert to ordinary shares and the table collapses back to one vote per share: 10% votes for 10% ownership. Same thing at the end of year five, unless the other shareholders vote to extend.

How to read an SR share IPO as an investor

Dual-class structures are neither good nor bad by default. They concentrate power in someone the market is betting on. A few things we would check in the offer document:

1. The voting ratio and the founder’s resulting voting share. Work out the table above for the real numbers. A 10:1 ratio on a large holding is a very different deal from 2:1 on a small one.
2. The sunset date. Note when the five years end and whether the articles hint at seeking an extension.
3. Board independence. Count the independent directors and look at their backgrounds, not just the headcount.
4. Related party transactions. These are coat-tail items, but heavy dealings with founder-linked entities still deserve a hard look.
5. Key person risk. The structure assumes the founder is the business. Read the risk factors on what happens if she leaves, and check the shareholding pattern after listing.

It is also worth remembering how little this route has actually been used. SEBI’s October 2021 memo states plainly that, up to then, no issuer had used the SR shares framework. Check the latest offer documents if you see a company claiming the structure.

The short version

Superior voting rights shares let executive founders of tech-intensive companies carry between 2 and 10 votes per share while ordinary shares are listed for the public. The founder gets no extra dividend, cannot exceed 74% of total votes, and loses the extra votes on a defined list of governance matters such as auditors, independent directors, related party deals and delisting. The shares convert within five years of listing, or up to ten with non-SR shareholder approval, and convert at once if the founder dies, resigns, sells or loses control. Boards of such companies need more independent directors. Read the voting maths and the sunset date before you apply. Those two lines tell you most of what you are signing up for.

Disclaimer: This article is for educational purposes only and is not investment advice. Company Z and all figures in the worked example are hypothetical. Regulations change, so check the current SEBI ICDR and LODR text before relying on any rule described here. Investing involves risk of loss; consult a SEBI-registered investment adviser before making investment decisions.