The intent may be to make it easier for new-age tech firms to list in India, but the bearing on corporate governance outweighs this
One finds it hard to understand SEBI’s enthusiasm for promoting shares with superior voting rights (SR). These are aimed at helping promoters and those in charge of running of new-age technology companies, although such shares can be issued by other companies. The argument that young entrepreneurs may not have sufficient capital to retain control over the businesses they have created, for a reasonable period, is somewhat overdone. There is more than enough evidence to show that if the investors are convinced the business model is a sound one, they do back the founders without making unreasonable demands. So, why should it be a problem if promoters or founders of new-age tech companies need to dilute their shareholding? Indeed, today’s entrepreneurs have it really easy because there is more than abundant capital sloshing around and there are enough ideas—in the West and in China—that can be adapted to Indian conditions. If the idea bombs—as many have—there is always another PE firm waiting with a cheque book.
Given the poor corporate governance standards in India and the even poorer enforcement of these rules, promoters don’t really need additional powers. It would be naive to believe that those helming start-ups would care to uphold corporate governance standards any better than their peers in the traditional businesses. They are as susceptible to taking short-cuts if they believe it would get them success faster. With investors—like PE players—today owning large stakes in companies and often calling the shots, the regulator is right in wanting to make controlling shareholders accountable rather than promoters. But, there is no case for them to be additionally empowered, especially once an enterprise is listed on the bourses.
The question is why these companies are so apprehensive other shareholders might shoot down their proposals. It is presumptuous on their part to think other shareholders are not capable of assessing the proposals put to vote. The regulator must not be cowed down by start-ups threatening to list outside the country.
While we do not want our investors to lose out in wealth creation, this cannot come at the cost of corporate governance. DVRs would reduce the limited clout that institutional shareholders—mutual funds and insurers and pension funds—enjoy today. This would be unfortunate since these wholesale investors are responsible for the savings of small investors. As it is, institutional shareholders rarely raise their voices or chasten errant managements; for the most part, they end up voting with their feet. Even otherwise, given how passive investing is becoming increasingly popular in the West, fund managers are becoming less inclined to engage meaningfully with companies. Also, small shareholders could be completely marginalised if promoters have more voting rights. SEBI must ensure that small shareholders don’t get a raw deal. SEBI may have good intentions and may have wanted to make it easier for new-age firms to list in India. However, the right intentions don’t always result in the right outcomes. The current set of guidelines may not be palatable, but SEBI should not dilute them. For instance, the regulator has received feedback that the condition requiring an SR shareholder to not be a part of the promoter group whose collective net worth is more than `500 crore is too onerous. But, it is not the regulator’s job to hand-hold entrepreneurs, but to watch over them.