Startups welcome move to ease rules for issuing differential voting shares

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The decision of the government to amend the Companies Act with with the aim to enable Indian entrepreneurs to retain control of their companies as they raise equity capital from global investors with DVR (Differential Voting Rights) shares, increasing it to 74 per cent of total voting rights from the existing 26 per cent, has been welcomed by the startup fraternity in the country.

“Easing the rules for issuing differential voting shares up by 48 percentage points—from 26 per cent to 74 per cent—is a welcome decision for the technology companies, especially startups. It would now ease the promoters who generally are the majority and controlling stakeholders in early stage startups to gain access to the cutting edge innovation in technology and pave the way ahead for their companies to become unicorns (valuation of more than $1 billion) of the industry. It will also help the promoters of Indian companies to gain control of their vision, resulting in exponential growth and maintain the long-term value for shareholders, even if they raise equity capital from global investors,” remarked Rajiv Ranjan, founder of the P2P lending startup PaisaDukan.

Experts had raised concerns of the founders community about the marginalisation of founders' equity during the course of successive rounds of fund raising. The new norms provisioned by corporate affairs ministry insulate the founders and protect their role. Experts have also pointed out that this is a prevailing practice in developed economies—different shareholders have different voting rights. This helps founders to have higher control over the operations and decision making of the company even though their equity stake might be lower.

“A lot many times we see that founders' stake goes below 25 per cent and they lose overall decision making control of the company. Sometimes, this become a problem for a company as investors with no ground understanding of the business dominate the decision making body. If founders have proper control through voting rights, the company can be managed better, which we see in US or European startups. This change will create a good environment in the startups and founders may not hesitate to raise more capital through dilution as they can retain more voting rights to enjoy business control.” said Bhavin Patel, co-founder, LenDenClub, a P2P fintech startup.

Market analysts have also observed that this move will particularly attract promoters who are looking to raise capital. With this move, the founders of the company can have a long-term vision and need not worry about losing control. This is particularly common in countries like the US and China, with many known founders using dual class share structure. “With this ease in norms, we will see many startups getting listed on domestic stock exchange to raise funding and this shall also give wings to Indian startups envisioning to be future unicorns,” said Abhishek Gandhi, co-founder, RupeeCircle, a fintech startup.

Experts such as Geetika Dayal, executive director of TiE Delhi-NCR, observed that this move will ensure that as innovative ventures continue to grow, their long-term vision and business strategy remain in the hands of their promoters and founders. “This will allow technology entrepreneurs to pursue institutional investments and drive hyper growth for their ventures without the fear of diluting their equity stakes,” added Dayal.

Market experts such as Alok Shende of Ascentius Consulting feel that though it is a very positive move, there is also a flip side to it. “These new norms could end up creating perverse incentives, where low stake founders could bear upon disproportionate influence at their companies, adversely influencing shareholder rights,” remarked Shende.