Huge Win For Startups: SEBI Allows Differential Voting Rights For Tech Companies

Market regulator Securities Exchange Board of India (SEBI) has allowed tech companies to issue differential voting rights shares.

In a media statement, SEBI said that amendments to the relevant regulations will put the new rule into effect to the framework. The new framework will be effective from July 1, making the process easier for the promoters of such companies go in for initial public offers.

For the uninitiated, differential voting rights (DVR) are like ordinary equity shares, except that the DVR shareholders have fewer voting rights as compared to the rights of an ordinary shareholder. DVR has been employed by the likes of Tata Motors and Future Retail to enable the founders to retain control of the company even if they have a minority stake.

However, the existing share capital rules say that a listed entity is required to have a three-year consistent track record of distributable profits to issue shares with DVRs.

SEBI chairman Ajay Tyagi told reporters that under the new framework a tech company with superior voting rights shares (SR shares) can do an initial public offering of only ordinary shares to be listed on the main board.

The tech companies here are defined as: those that intensively use technology, information technology, intellectual property, data analytics, biotechnology or nano-technology to provide products, services or business platforms with substantial value addition.

Welcoming the differential voting rights announcement, Bhavish Aggarwal, cofounder and CEO, Ola said, “I‘m certain this will encourage Indian companies to list within the country, backed by our own people. Made in India businesses and entrepreneurs can control their destiny and build for the world!”

Here are the key approved proposals related to differential voting rights for tech companies:

• The SR shareholder should be a part of the promoter group whose collective net worth does not exceed INR 500 Cr
• SR shares have been held for a period of atleast 6 months prior to the filing of red herring prospectus (RHP)
• SR  shares have voting rights in the ratio of minimum 2:1 to maximum 10:1 compared to ordinary shares
• SR shares shall be under lock-in after the IPO until their conversion to ordinary shares
• The total voting rights of SR shareholders (including ordinary shares), postlisting, shall not exceed 74%
• Post-IPO, the SR equity shares shall be treated as ordinary equity shares in terms of voting rights
• The SR shares shall be converted to ordinary shares on the 5th anniversary of listing
• SR shares shall compulsorily get converted into ordinary shares on occurrence of certain events such as demise, resignation of SR shareholders, merger or acquisition where the control would be no longer with SR shareholder, etc

With regards to IPOs in India by startups, 2017 proved to be a blockbuster year with a record 122 companies raising a staggering $10.85 Bn through IPOs, however, 2018 witnessed the bigger performance.

An EY India’s IPO Readiness Survey Report showed that India IPO activity was at a comparably higher level and saw 90 IPOs raise $3.9 Bn, driven by solid activity in Q1 18.