Companies

Start-ups get a boost as Centre raises cap on shares issued with DVRs

Our Bureau New Delhi | Updated on August 16, 2019 Published on August 16, 2019

Low attrition rates, growing ecosystem of tech start-ups and support from State governments are also factors that attract MNCs to tier-2 cities

The move is likely to help start-ups raise funds, while allowing promoters to retain control over their companies

The Centre has sweetened the deal for start-ups and other firms with regard to the issuance of shares with differential voting rights (DVR).

Promoters of Indian companies can now issue a much larger proportion of shares with such rights, helping them retain control over their companies even as they raise equity capital from investors.

The Corporate Affairs Ministry said on Friday it has revised the cap on differential voting rights shares upwards to 74 per cent of the total voting power from the existing 26 per cent.

Another key change is the removal of the earlier requirement of distributable profits for three years for a company to be eligible to issue shares with differential voting rights, the ministry said in a release on Friday.

The ministry said these initiatives have been taken in response to requests from innovative technology companies and startups.

The two changes are expected to give a boost to the start-up ecosystem. It is also meant to strengthen the hands of Indian companies and their promoters, who have lately been targeted by deep-pocketed global investors for acquisition of controlling stakes in order to gain access to their cutting-edge innovation and technology development.

The Centre had noted that in the absence of these two changes, Indian promoters have had to cede control of their companies, some of which had prospects of becoming Unicorns (startups that have a market valuation of at least $1 billion), due to the requirement of raising capital by issuing equity to foreign investors.

Also, the period within which employee stock option plans (ESOPs) can be issued by start-ups recognised by the Department for Promotion of Industry & Internal Trade to promoters or directors holding more than 10 per cent of equity shares has been enhanced to 10 years from the date of incorporation, against five years earlier.

Commenting on the MCA move, Saurav Kumar, Partner, Induslaw, said the changes are specially beneficial for the start-up ecosystem. With companies requiring to enhance the capital base without compromising on the management, the changes would help the promoters raise capital through equity but still have control of the company, he said.

From an investors’ perspective, the changes may be beneficial in a situation where the investors would like to invest without qualifying the investee company as their group company, Kumar told BusinessLine.

Mohit Saraf, Senior Partner, L&L Partners, said this is a very good change and would help founders to raise capital without losing control. “Right now, the law was coming in the way... now law will provide an enabling environment and the founder will be free to negotiate commercially,” he said.

Published on August 16, 2019
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