The government is likely to restrict the ability of domestic companies to allot preferential shares to overseas partners and investors. It also wants to limit the rights enjoyed by these holders of preferential shares. This is being planned to avoid domestic promoters bequeathing ownership rights to overseas partners.
?Preferential shares and options are one way that foreign companies and shareholders can have unlimited powers in the running of the company. Apart from economic ownership, such preferential allocations give them beneficial ownership. We are looking at ways to plug this,? said a government official.
In a number of instances, the government has found that domestic owners have given away preferential shares to overseas investors with rights disproportionate to their holdings. Among the options being considered are limiting the representation of overseas preferential shareholders in the management and running of a company. It is also debating ways to restrict their role on the board. ?A number of suggestions are being considered. We are yet to take a final call,? said the official.
Preferential shares differ from common shares as the former have ?preferred? rights to dividends. Usually, companies issue such shares to promoters and their relatives. The government has, therefore, brought in a number of rules to regulate the pricing of preferentially allotted shares to promoters and domestic investors, as it was viewed as a way for promoters to shore up the shareholding in companies ahead of a public listing.
Current rules stipulate that preferential shares are eligible for listing only if disclosures specified in the guidelines are made, shares are locked in and fully paid up at the time of allotment.