Explaining the rationale, the lobby group said that since majority of HGTCs are founded, promoted and managed by young entrepreneurs – mostly first-generation entrepreneurs – they work on an asset-light model and invest in intangible assets such as codes, programmes and human capital.
Industry lobby group IndiaTech, which represents technology start-up firms like Ola, makemytrip and Hike, has suggested an exemption for promoters of high growth technology companies (HGTCs) from maintaining a minimum stock holding requirement of 20% post the initial public offer (IPO).
Responding to a consultation paper floated by capital markets regulator Sebi on issuance of shares with differential voting rights (DVRs), the lobby group said: “We recommend that, in case of HGTCs, Sebi should consider exempting the promoters (founders) from complying with the minimum promoter’s contribution requirement”. In the consultation paper, Sebi has not proposed any exemption for HGTCs on the requirement that promoters must hold at least 20% of the post-issue capital.
“Practically, when HGTCs reach a critical mass usually the promoter holding anywhere in the world stands below 20%. We strongly recommend against prescribing any percentage threshold for promoter (founder) capital. We, therefore, recommend exemption since multiple rounds of equity investment dilutes promoters’ shareholding in HGTCs to very low levels, resulting in their inability to meet the minimum promoters’ contribution requirement,” IndiaTech said.
Explaining the rationale, the lobby group said that since majority of HGTCs are founded, promoted and managed by young entrepreneurs – mostly first-generation entrepreneurs – they work on an asset-light model and invest in intangible assets such as codes, programmes and human capital. They are invariably forced to depend on equity investments from strategic investors for expansion and growth.
Due to multiple rounds of equity infusion, the promoter shareholding is often reduced to low levels and hence they are unable to meet the minimum promoters’ contribution requirement, prescribed under the Issue of Capital and Disclosure Requirements (ICDR) regulations.
“It is also plausible that eligible strategic investors who are qualified to contribute in case of a shortfall in minimum promoter’s contribution may not be willing to contribute the shares held by them to be locked in for a period of three years from the date of allotment in the IPO, as part of promoters’ contribution. From a global perspective, we note that this practice is unique to India and there are no other countries that implement this requirement,” it added.
The industry group has also stressed on promoters retaining control of their companies after the IPO. This is against Sebi’s proposal of a sunset period of five years after IPO for conversion of shares with superior rights (SRs) to ordinary shares, with a further extension of five years with shareholders’ approval in a general meeting by way of a special resolution.
IndiaTech wants this period to be doubled to 20 years. “For SR shares, we strongly recommend that there must be no sunset clause. However, in the event it is not considered then we recommend a sunset period of at least 15 years, which can be extended for another five years with shareholders’ approval in a general meeting by way of a special resolution,” it added.
Post an IPO, a period of 15 to 20 years is significant for growth of the company, in terms of operations, maintaining profitability, best serving its investors, and ensuring stability in management. Therefore, a sunset period of five years would not be appropriate, especially for HGTCs, IndiaTech said.
On the regulator’s proposal for a cap on shares with DVRs at 26% of the post-issue paid-up equity share capital, IndiaTech said: “We strongly recommend increasing the current cap on shares with DVRs from 26% to above 51% of the post-issue paid-up equity share capital”. It explained that HGTCs focus more on growing revenue or gross merchandise value (GMV) rather than immediate profitability. Besides, a dual-class structure encourages entrepreneur-driven HGTCs to list and assist promoters (founders) to focus on long-term success and profitability.
“Increasing the current cap on shares with DVR from 26% to above 51% of the post-issue paid-up equity share capital 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 added. Additionally, the fungibility will aid HGTCs to phase-out dual class structures should they decide to convert SR shares into ordinary shares.