Differential voting rights are good for Indian startups aiming for IPO – but not enough

  • In its board meeting, the Securities and Exchange Board of India has allowed the issuance of Differential Voting Rights for listech tech companies.
  • This will help promoters keep control of their company without having to dilute their power for financial help.
  • This is a positive step which will help companies head for an IPO in an easier manner.
India’s Securities and Exchange Board of India has allowed Differential Voting Rights for listed companies in its board meeting which was held today.

With Differential Voting Rights, companies whose promoters hold skill and talent to run the business can sell shares giving away their control in the company.

This new framework comes in handy for companies who do not want hostile takeovers by investors. A recent case in point is the L&T’s hostile takeover of Mindtree, where the former took a 60% controlling stake in the latter.

"Raising equity on a periodic basis leads to dilution of founder/ promoter stake, which can be effectively addressed through the use of DVRs as a mode of capital raising.This is especially relevant for new technology firms which have asset light models, with little or no need for debt financing,” the SEBI discussion paper on the issue had noted.

"Having a specific listing framework for DVRs of tech start-ups only shows that SEBI recognises the need to encourage entrepreneurship in nano-technology and biotech. India had been wary of introducing this in the past because many listed companies in India are promoter driven till date. The introduction and success of DVRs also requires balancing other concerns. It remains to be seen how this pans out from a corporate governance viewpoint,” said Sumit Agrawal of Regstreet Law & ex-Sebi official.

But will the issuance of DVR make it easier for startups in India to head the IPO way? Experts believe it is at least the first right step.

“Superior rights to be considered as ‘control’ under takeover code, relaxation from lock-in requirements before IPO, implementation of sunset clause and threshold to consider such superior shareholders a part of promoter group, are some issues requiring clarity. Right now, it’s only a policy approval from SEBI, the letters of law in gazette notification is yet awaited.” said Agrawal.
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