Government Relaxes Norms For Shares With Differential Voting Rights
A man stands in front of the Bombay Stock Exchange. (Photographer: Dhiraj Singh/Bloomberg)

Government Relaxes Norms For Shares With Differential Voting Rights

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In a fillip to startups, the government has relaxed norms for shares with differential voting rights that will help such companies to retain control while raising equity capital.
These changes come after market regulator Securities and Exchange Board of India also liberalised its DVR regulations permitting the issue of superior voting right shares.

A differential voting right share is one with higher or lower voting rights but the same economic interest as ordinary shares. Shares with higher voting rights have been used by entrepreneurs around the world to retain control of their companies even while selling ordinary equity to investors to raise capital. India’s DVR share regime has so far been marked by missteps but the recent SEBI changes and now this move by the ministry of corporate affairs will make it easier for startups to use DVR shares to retain control.

The corporate affairs ministry has amended the Companies (Share Capital & Debentures) Rules under the Companies Act to effect two changes -

1. Allow companies to have up to 74 percent of the total post issue paid up share capital as DVR shares, up from the earlier 26 percent.

2. Do away with the three year profit track record requirement for issuance of DVR shares.

“Another key change brought about is the 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 in a release on Friday.

A three-year profit track record is uncommon in young companies and the pre-condition had deprived them from the benefit of issuing DVR shares.

According to the ministry, the amendments have been made in response to requests from innovative technology companies and startups.

They would also “strengthen the 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,” the ministry said.

Alongside, the government also changed ESOP rules. Employee Stock Options can now be issued by startups to promoters or directors holding more than 10 percent of equity shares for 10 years from the date of their incorporation.

The time period for such ESOPs was five years earlier.

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