Startups Can Now Raise Funds Without Founders Losing Control! 

Indian startups have long had to keep giving away control of their companies and ideas to foreign investors in return for capital to continue scaling up. This however may change soon due to the Indian government’s latest regulatory amendment with respect to differential voting rights.

The Ministry of Corporate Affairs (MCA) has amended rules to now allow Indian companies to raise more share capital without diluting the voting rights of all existing shareholders.

“Indian promoters have had to cede control of companies, which have prospects of becoming unicorns, due to the requirements of raising capital through the issue of equity to foreign investors,” ministry of corporate affairs (MCA) said in a statement.

The MCA has now raised the existing cap to 74% differential voting rights (DVR) shares of the total post issue paid-up share capital from the earlier 26%. The corporate affairs ministry has amended the Companies (Share Capital & Debentures) Rules under the Companies Act.

“Another key change brought about is the removal of the earlier requirement of distributable profits for three years for a company to be eligible to issue shares with DVRs,” the ministry said in a release on Friday.

The ministry noted that this change would “strengthen” the hands of Indian companies and their promoters who have attracted deep-pocketed international investors to acquire controlling stake and access to the “cutting edge innovation and technology development being undertaken by them”.

The government has also upped the time within which employee stock options can be issued by start-ups to promoters or directors holding over 10% of equity shares, from 5 years to 10 years from the date of their incorporation. Start-ups recognised by the department for promotion of industry and internal trade (DPIIT) will be able to avail of this provision.

Earlier this week, the finance ministry issued an official circular that seeks to simplify the angel tax assessment process for all the startups.

It said the applicability of angel tax would not be pursued during the assessment proceedings and “inquiry or verification concerning other issues in such cases shall be carried out by the assessing officer only after obtaining approval of his/her supervisory officer.” Even if a startup is not recognised by the DPIIT, then too the inquiry would be carried out after the approval of a supervisory officer.

These policy measures come at a time when the Indian economy appears to be entering a phase of growth slow down and with the ease of doing business in India or rather difficulty being a regular talking point in the days after VG Siddhartha founder of Cafe Coffee Day allegedly committed suicide citing harassments by income tax officials.