Boon to start-ups: Centre raises cap on differential voting rights

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Published: August 17, 2019 12:30:35 AM

The two incentives have been offered following requests from tech companies and start-ups, as well as to strengthen hands of Indian companies and their promoters

Govt removes 3-year distributable profit norm to be eligible to issue shares with DVRsGovt removes 3-year distributable profit norm to be eligible to issue shares with DVRs

In a significant development, the ministry of corporate affairs (MCA) on Friday said it has amended the Companies Act to raise the cap on differential voting rights (DVRs) to 74% from the existing 26%, a move that will aid start-ups and promising high growth technology companies (HGTCs) raise equity capital from global investors without worrying about ceding control of their firms.

Another positive development is that the ministry has also done away with the norm of having distributable profits for 3 years for a company to be eligible to issue shares with DVRs.

The two incentives have been offered following requests from tech companies and start-ups, as well as to strengthen hands of Indian companies and their promoters who have lately been identified by deep pocketed investors worldwide for acquisition of controlling stake in them to gain access to the cutting edge innovation and technology development being undertaken by them.

“Key change brought about through amendments to the Companies (Share Capital & Debentures) Rules brings in an enhancement in the previously existing cap of 26% of the total post issue paid up equity share capital to a revised cap of 74% of total voting power in respect of shares with DVRs of a company. Another key change brought about is removal of the earlier requirement of distributable profits for 3 years for a company to be eligible to issue shares with DVRs,” the ministry said.

“Government had noted that such Indian promoters have had to cede control of companies which have prospects of becoming unicorns (companies with valuation of or more than $1 bn), due to the requirements of raising capital through issue of equity to foreign investors,” it added.

Issuance of DVRs is allowed in some matured markets like the US and Hong Kong. Founders of top tech companies like Facebook and Google have issued DVRs to investors in order to retain control of their companies.

The government also raised the time period within which employee stock options (ESOPs) can be issued by start-ups to promoters who hold more than 10% stake. This period has been raised from the existing 5 years to 10 years from the date of a firm’s incorporation. The incentive is only available to start-ups recognised by the Department for Promotion of Industry & Internal Trade.

Industry lobby group, IndiaTech, which represents technology companies like Ola, makemytrip and Hike, in May this year, had recommend increasing the current cap on shares with DVRs from 26% to above 51% of the post-issue paid-up equity share capital.

Responding to a consultation paper floated by markets regulator Sebi on issuance of shares with DVRs, IndiaTech explained that HGTCs focus more on growing revenue or gross merchandise value (GMV) rather than immediate profitability.

Besides, a dual-class structure fortifies entrepreneur-driven HGTCs to list and assist promoters (founders) to focus on long-term success and profitability.

Hence raising the cap will facilitate HGTCs to effectively implement the dual class structure, in the event restrictions are imposed over use of super voting rights, including cap of voting rights ratio of shares carrying superior voting rights relative to other ordinary shares, it had said.

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