Starting from 1986, this practice of NYSE has been formalised. With the other competing stock exchanges, NASDAQ and American Stock Exchange, allowing listing of securities with unequal voting powers, there is no question of NVS being illegitimate in the US. The declared objective of NVS is to use such dual class shares as a defence mechanism against hostile take overs. Granted, corporate democracy is important. The defining principle of current American corporate law seems to be, if the existing shareholders agree to the creation of a new type of shares with no voting rights, why should we object? This is also the principal driving force behind Mr Chidambaram's proposal. At a recent meeting of corporate representatives, one entrepreneur pointed out, that he was somewhat mystified by the angry reactions of some FIIs to the proposal. Perhaps, this is because of a fear of fall of equity prices. Ofcourse, there could be a fall in value of the prices of existing stock of shares whenever additional shares are issued. But, this could happen even with new voting shares. Some experts feel that in a situation where NVS are being issued, the value of voting shares per se could go up, under certain circumstances.

I have seen a number of cases where promoters of well run small and medium sized companies have hesitated to issue additional shares, simply because they are afraid of losing their control. In such cases, the promoters have either to restrict growth or to resort to some other device of enhancing their access to resources. The only way now available — if they want to avoid debt is the issue of preference shares, which do not have voting rights and carry fixed returns. But, this is not too attractive to the investing public, as they do not share in growth. In my view, many small and medium companies will be able to take advantage of the proposed NVS.

In my view, the reaction of the markets to NVS has been too sharp. If only the operators understand the greater flexibility which NVS can bring to corporate financing and growth, they will perhaps react less violently. Issue of further capital without according voting rights can be made to either new shareholders or to existing shareholders or both. This will enable easier expansion of firms without the fear of loss of control. It will go far to enhance growth. In fact, empirical work by analysts has shown that in such circumstances, the reduction of the threat of take over enables faster corporate expansion and can lead to enhanced value for existing shareholders.

Let us recognise that NVS with permission of existing shareholders cannot be equated with their disenfranchisement. The issue of NVS can be compared to the issue of global depository rights, where the votes are exercised - atleast till conversion - by the trustees and not by the holders. Such a diminished voting right has not made GDRs any less popular. Again, non-voting shareholders are as much members of the company as any other shareholder. They are expected to receive notice of the annual general meeting and to attend it, although they do not vote. They are debarred only from the right to choose directors. The holders also permitted to approach the company law board.

While a NVS is not such a grave danger as the critics make it out to be, Sebi should take care to ensure that once they are introduced, their problems are handled imaginatively. Sebi should be flexible in nursing the transition. A proper pricing mechanism for NVS has to be put in place. One suggestion to reduce the negative impact is, for Sebi to mandate that in take over bids, both NVS and voting shares should be offered the same price. This may be worth exploring, although voting shares normally command a higher price. Sebi should be prepared to be flexible, even as it learns through experience when more companies issue NVS.

The finance minister has put forth an interesting proposition. He has not compelled the issue of NVS. All that he has done is to permit companies to vote themselves the right to issue NVS. Surely, this cannot be such a crime against corporate democracy, as is made out by critics. The markets in the Mecca of capitalism live and flourish in spite of the existence of NVS. Why should the Indian bourses be different?