Dual Class Shares: How Superior Voting Rights Work in a Tech IPO

Most of us buy shares assuming one share means one vote. Dual class shares break that link. A founder can own a fifth of a company and still decide who sits on the board, because their shares carry several votes each while yours carry one. If you apply to tech IPOs, it pays to know how this works, what India allows, and where the founder’s extra power switches off.

We will go through the global idea first, then SEBI’s version (which it calls superior voting rights, or SR, shares), and then run a worked example with simple numbers so you can see exactly how the vote splits.

What dual class shares actually are

The definition is short. A dual class structure gives different voting rights to different groups of shareholders. One class, usually held by founders and executives, carries more votes per share. The class sold to the public carries fewer. Investopedia’s explainer on dual class stock puts the purpose plainly: it lets company leaders keep long-term control even after they sell shares to outside investors.

The naming is not standard. In some companies Class A is the powerful class, in others it is Class B. So the label tells you nothing on its own. You have to read what each class actually gets.

The textbook case is Google. When it listed in 2004, Class A shares went to ordinary investors with one vote each, while Class B shares went to founders and executives with ten times as many votes. Later the company added a Class C share with no voting rights at all, as the same Investopedia page records. Ford is an older example: the Ford family holds about 40% of the voting power while owning a small slice of the total equity.

Why founders want it, and why investors push back

The founder’s argument goes like this. A listed company faces quarterly pressure, activist funds and the threat of a hostile takeover. Extra votes let the people who built the business stick to a long plan without being voted out the first time a strategy looks slow. Investopedia lists exactly these points on the supporters’ side: focus on long-term goals, and protection against takeovers.

The other side is just as clear. Public shareholders put up most of the money but get less say. Critics call it an unequal distribution of risk: the founder keeps control cheaply, while outside holders carry most of the consequences if the strategy goes wrong.

Extra votes do not make a founder right. They only make it harder for anyone else to say they are wrong.

Markets have swung back and forth on this. The NYSE banned dual class structures in 1940, after an outcry in 1926 over Dodge Brothers selling non-voting shares to the public, and then allowed them again in the 1980s under competition from other exchanges. More recently, the S&P 500 and FTSE Russell indexes stopped including companies with such structures, according to Investopedia. That index point matters for an investor: it can affect how much passive money ever flows into a stock.

How SEBI’s superior voting rights framework works

India took a narrower route. SEBI’s board approved a framework for SR shares in June 2019, and its board meeting press release lays out the conditions. The key design choice: a company with SR shares can do an IPO of only ordinary shares on the Main Board. The founder’s SR shares already exist before the IPO. The public never gets offered the high-vote class.

Who qualifies

The 2019 conditions were tight:

• The issuer has to be a tech company, meaning intensive in the use of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology.
• The SR shareholder has to be part of a promoter group whose collective net worth does not exceed Rs 500 crore, leaving out their investment in the issuer itself.
• SR shares can be issued only to promoters or founders who hold an executive position in the company.
• The issue of SR shares needs a special resolution at a general meeting of shareholders.
• The SR shares must have been held for at least six months before the red herring prospectus is filed.
• Voting rights have to be between 2:1 and 10:1 compared with ordinary shares.

That last band is the number to remember. Even the most powerful Indian SR share is capped at ten votes, the same multiple Google gave its Class B in 2004. If you want to know where the RHP fits in the IPO timeline, our guide to the red herring prospectus walks through it.

Lock-in, dividends and the 74% ceiling

SR shares get listed after the IPO, but they stay locked in until they convert into ordinary shares. Promoters cannot transfer them among themselves, and no pledge or lien is allowed on them. In everything except voting, including dividends, SR shares are treated the same as ordinary shares.

Then comes the ceiling. After listing, the total voting rights of SR shareholders, counting their ordinary shares too, cannot go above 74%. That number is not random. It leaves the public with more than a quarter of the votes. That matters because a special resolution commonly needs at least 75% of the votes cast, as the Wikipedia entry on special resolutions explains. Below that line, the founder can run the company day to day but cannot push a special resolution through alone.

For background on how other lock-ins work around an issue, see our explainer on the IPO lock-in period.

Tighter governance as the price of control

SEBI asked for enhanced corporate governance in return. At least half the board, and two-thirds of the committees other than the audit committee, have to be independent directors. The audit committee has to be made up only of independent directors.

Coat-tail rules: when one SR share gets one vote

This is the part most IPO investors skip, and it is the part that protects them most. Under the coat-tail provisions in SEBI’s framework, an SR share counts as just one vote on certain matters after the IPO. These include:

• appointing or removing independent directors or the auditor;
• a promoter willingly handing control to another entity;
• related party transactions involving the SR shareholder;
• voluntary winding up of the company;
• changes to the articles or memorandum, other than changes that affect the SR instrument;
• starting a voluntary resolution plan under the IBC;
• using funds for purposes other than the business;
• substantial value transactions above the LODR materiality threshold; and
• special resolutions on delisting or buyback.

Look at the pattern. Wherever the founder has a personal interest that could clash with yours, such as who audits the books, related-party deals or a sale of control, the extra votes vanish. The founder keeps the steering wheel on strategy but loses it on self-dealing.

The sunset clause

SR shares are not forever. Under the 2019 framework they convert into ordinary shares on the fifth anniversary of listing. The term can be extended once, by another five years, through a resolution on which the SR shareholders themselves cannot vote. There is also event-based conversion: SR shares convert compulsorily on events such as the death or resignation of the SR shareholder, or a merger or acquisition that takes control away from them.

Investopedia notes that a “middle path” suggested in the global debate is exactly this kind of time-bound restriction. India built it in from day one.

A worked example: how the votes split

Let us take an imaginary listed tech company. These are illustrative numbers, not any real issuer.

• The founder holds 20 lakh SR shares, each with 10 votes (the maximum ratio).
• Everyone else, including IPO investors, holds 80 lakh ordinary shares with one vote each.
• Total shares: 1 crore. All shares get the same dividend.

Economic interest. The founder owns 20 lakh of 1 crore shares, so 20% of the company. If the company pays Rs 5 per share as dividend, the founder gets Rs 1 crore and the other holders get Rs 4 crore between them. Same rate per share.

Voting on an ordinary resolution. The founder has 20 lakh × 10 = 2 crore votes. The others have 80 lakh votes. Total votes = 2.8 crore. The founder’s share of the vote is 2 ÷ 2.8, about 71.4%. That is under SEBI’s 74% ceiling, so the structure is allowed, and the founder wins any ordinary resolution alone.

Voting on a special resolution. With the usual 75% bar for a special resolution, 71.4% falls short. The founder needs at least some public holders to vote with them.

Voting on appointing the auditor. Coat-tail kicks in. Each SR share now counts as one vote, so the founder has 20 lakh votes out of 1 crore, or 20%. The public holders decide.

Now suppose the ratio were 12:1. The founder would have 2.4 crore votes out of 3.2 crore, which is 75%. That breaks both the 10:1 cap and the 74% ceiling, so it cannot happen under the framework. This is a quick way to sanity-check any structure you see in an offer document: multiply SR shares by the ratio, add the founder’s ordinary shares, and divide by total votes.

Run the arithmetic before you apply: 20% of the economics can mean 71% of the votes on day one and only 20% on the questions that protect you.

What changed after 2019

The framework did not stay frozen. In 2021 a SEBI board memorandum, Review of certain provisions related to Superior Voting Rights Shares Framework, proposed loosening some conditions after recommendations from its Primary Market Advisory Committee. The proposals included:

• measuring net worth on an individual basis, with an SR shareholder’s net worth capped at Rs 1,000 crore instead of the Rs 500 crore promoter-group test;
• counting investments in other listed companies toward net worth, while still leaving out the investment in the issuer, with valuation by a registered valuer; and
• cutting the holding period before the RHP from six months to three months.

The same memo kept the rule that SR shares go only to individuals, not trusts, and it repeats that SR benefits last a maximum of five years after listing, extendable by five more with shareholder approval. Since rules get amended, always read the current ICDR text and the company’s own offer document rather than relying on any summary, including this one.

What to check in an IPO with SR shares

If an issue you are tracking discloses SR shares, here is what we would look for in the DRHP and RHP:

• The voting ratio and the founder’s total voting percentage after the issue. Do the arithmetic from the example above.
• The sunset date. When does conversion happen, and has the company said anything about seeking an extension?
• Event-based triggers. What happens if the founder steps back from an executive role?
• Board composition. Are the independent directors genuinely independent, and is the audit committee fully independent as required?
• Index eligibility. Some global index providers exclude multi-class companies, which can limit passive demand over time.
• Related-party transactions. These sit under coat-tail rules, but a long list of them is still worth a hard look.

Dual class shares are not good or bad by themselves. They are a trade: you accept less say in exchange for backing a founder you believe in. India’s version caps the trade with a vote ratio, a 74% ceiling, coat-tail rules and a sunset. Know those limits and the structure stops being a mystery. For the wider picture on applying to issues, start with our guide to IPO investing in India, and read our piece on IPO underpricing to see how pricing plays into first-day returns.

Disclaimer: This article is for educational purposes only and is not investment advice. Please do your own research or consult a SEBI-registered adviser before making any investment decision.