Indian startups have welcomed markets regulator Securities and Exchange Board of India’s (Sebi’s) approval for issuance of shares with differential voting rights (DVRs), although clarity is awaited on the sunset clause for such dual-class shareholding and the net worth limit for shareholders with superior voting rights.
In its board meeting on Thursday, Sebi approved a framework of such share issuances for tech startups keen to list on Indian bourses.
The move is expected to allow startup founders to have a greater control over their ventures even after diluting a significant portion of their holdings, while raising multiple rounds of equity financing.
In the recent past, leading Indian entrepreneurs including ride-hailing company Ola’s Bhavish Aggarwal have tried taking greater control of their companies by reworking founder’s rights.
Aggarwal, along with Deep Kalra, the group chief executive of Nasdaq-listed MakeMyTrip and Flipkart founder Sachin Bansal, have been the prime backers of IndiaTech, an advocacy group that has been lobbying with the government on various issues, including DVRs.
Dual-class share structures and DVRs are common in the United States and China.
Facebook’s Mark Zuckerberg, Alibaba Group’s Jack Ma and Under Armour’s Kevin Plank, among others, have adopted DVR structures.
A dual-class share structure, along with DVRs for founder-promoters, could encourage the most valuable startups to list locally rather than on overseas bourses such as the Nasdaq or the New York Stock Exchange.
“This is, conceptually, a big win. For the first time, it is being acknowledged that the broader technology sector needs to have DVRs…We still, however, have to look at the fine print,” Rameesh Kailasam, chief executive of IndiaTech, told ET.
While DVRs are a critical requirement, it is also important to ease some of the basic listing norms, especially around minimum promoter holding requirement to enable listing, Kailasam added.
Most of India’s tech unicorn founders hold stakes ranging from low single-digits to mid-teens in the companies they have created.
“It’s great news for technology and new-age companies in India. It gives better negotiating power and leverage to local founders,” a leading startup’s founder told ET.
Anand Lunia, founder, India Quotient, an early-stage fund, “Great news for founders. We need companies that will last generations. Founders are diluting too much. Superior rights should begin at the VC stage and then smoothly transition to public markets. I expect some resistance from VCs but they too understand founder control is best in long term.”
It has been suggested earlier that DVRs should be restricted only to new technology firms that have yet to get listed and are in the areas of IT, IPR, data analytics, bio-technology or nano-technology.
Also, shareholders with superior rights should be a part of promoter groups having a collective net worth of not more than Rs 500 crore. In addition, superior shareholders must be promoters or founders holding executive positions in the company.
Besides, such shares need to be held for at least six months before filing of the IPO papers. There would also be a sunset clause, a thorny issue for India’s major tech startups that have lobbied against the five-year period mandated thus far.
The sunset clause specifies how many years differential voting rights will prevail after a company is listed.
IndiaTech has proposed a sunset period of at least 15 years, which could be extended by another five with shareholder approval.
“I do think that these criteria they have come out with today will not solve all the issues, but overall it’s a start, and these directives, such as the sunset clause and profitability, may get relaxed going forward,” said Harshil Mathur, chief executive of Tiger Global-backed fin-tech company Razorpay.
Mathur and co-founder Shashank Kumar had amended their board rights, allowing the duo to now hold two votes for each of their board seats, while investors hold one vote per board seat. The move gives them majority control of the board for every resolution, including removal of or appointing a CEO.
“Of course, investors don’t really like to do this, but largely, they don’t have a problem with it. They invest to earn outsized returns, and not to run the company, and they know they can only earn such returns when the founders are completely in charge of the direction of the company,” Mathur said.