IndiaTech has proposed SEBI to enhance the sunset clause from 5 years, post IPO, to 15 years along with an extension of 5 years, if required. This would allow startup founders to retain control of their businesses for a longer period of time irrespective of their stakes.
IndiaTech — a lobby group for internet businesses and technology investors in India set up by founders of Ola, MakeMyTrip, Steadview Capital and Hike, has suggested the Securities and Exchange Board of India (SEBI) enhance the sunset clause (duration for which differential voting rights or DVR can be exercised by startups) from 5 years, post IPO, to 15 years along with an extension of 5 years, if required. This would allow startup founders to retain control of their businesses for a longer period of time irrespective of their stakes.
IndiaTech has recently responded to SEBI’s consultation paper that it came out with on March 20 this year with respect to regulations around the issuance of shares with DVR — that doesn’t dilute the founders’ or promoters’ voting rights.
“Currently, there is no sunset clause in other geographies. Five years is too short a time post IPO for a founder to grow and run the company strategically with respect to operations, profitability, management stability. Companies such as Facebook, Google, Zynga, Snap, have put in place dual-class structure upon listing to enhance the voting power of their promoters to enable them to maintain control despite their relatively small shareholdings,” IndiaTech CEO Rameesh Kailasam told Financial Express Online.
On the other hand, investors put money in the companies having faith in entrepreneurs but if they wouldn’t be in control after five years then they may not invest in those companies, said Kailasam.
Easing route to IPO
On account of multiple rounds of equity infusion, the shareholding of founders is often reduced to very low levels; narrowing down to single digits in many cases. Some of such founders more persistent prefer to set up businesses outside India in countries like Singapore and the US for better regulatory, fundraising and more importantly IPO environment.
“The dual-class structure has demonstrated a proven track record of assisting founders to concentrate on their core management functions. It will aid in protecting the founder’s vision, on the underlying technology and innovation without getting diluted while raising capital,” said Kailasam.
Over the years, multiple Indian startups including Flipkart, InMobi, Grofers, Freshworks, Druva, Droom, Grey Orange, Crayon Data, MakeMyTrip, Yatra etc., have either registered themselves outside India or listing on foreign exchanges.
For the better listing environment, IndiaTech has proposed exemption of minimum 20 per cent stake requirement by founders in the company post-IPO as majority entrepreneurs have minimum stakes in the ventures.
“Founders would require strategic investors to contribute to fulfill this (20 per cent) requirement. This is not only a unique requirement to India but is also a major challenge for the founders and investors given that any such contribution comes in with a three-year-lock-in period in shares post IPO,” said Kailasam.
IndiaTech has also asked allowing entrepreneurs for confidential filing that SEBI hasn’t elaborated in the consultation paper. An entrepreneur might want to simply test the market but if there are no takers, he/she might want to avoid disclosure of sensitive commercial and proprietary and financial information to the market and to competitors. “The advantage in confidential filing is that the founder will not have sensitive information published and also provides them an opportunity to ascertain investors’ appetite to participate in the proposed public offering,” Kailasam added.
Among other proposals has also sought to increase the cap on shares with DVRs from 26 per cent to 51 per cent of the post-issue paid-up equity share capital “to effectively implement the dual class structure, in the event restrictions are imposed over the use of superior voting rights,” IndiaTech responded to SEBI.