The government will review restrictions on shares with differential voting rights (DVRs) in the Companies Act to make it easier for promoters of startups to raise equity capital without losing control. In particular, the government will reconsider the cap of 26 per cent of paid up share capital on DVRs as well as companies requiring a three-year track record of distributable profit to issue such shares. This follows the regulator announcing a new DVR framework starting July 1.
Separately, the government will also review the norm mandating creation of debenture redemption reserves equivalent to 25 per cent of outstanding debentures, considered onerous by the industry.
“(Regarding) differential voting rights and debenture redemption reserves for raising bonds, if there are certain provisions which are more onerous and increasing the cost of capital, then we will have to re-look at it and calibrate it to make more finance available for investment,” said a senior government official.
Up until recently, India only allowed DVRs with lower voting rights but even these weren’t widely adopted because of restrictive conditions. Tata Motors is among a handful of companies that have issued such equity.
The Securities and Exchange Board of India (Sebi) last month approved a new DVR framework for tech companies, allowing promoters to retain shares with superior voting rights.
The government review will be embraced by startups, said a legal expert.
“This is a welcome move as it will address a key concern of startups who have sought to use DVRs to be able to raise capital without diluting control over their companies,” said Ankit Singhi, partner at law firm Corporate Professionals.
Allowing DVR shares to the extent of 50 per cent or 75 per cent and scrapping the three-year distributable profit norm will allow promoters of startups room to raise more capital as they expand operations without diluting control, Singhi said.
Another government official said that the ministry of corporate affairs had received representations from the industry against the requirement to create a debenture redemption reserve equal to 25 per cent of outstanding debentures and would consider making appropriate changes. The recent budget dropped the requirement of debenture redemption reserves for non-banking finance companies (NBFCs) that raise funds through public issues.