Now, start-ups can issue shares with differential voting rights

Start-ups and technology companies will be able to issue shares with differential voting rights (DVRs) with the government amending the Companies Act provisions to help entrepreneurs retain control even as they raise equity capital from global investors.

The ministry of corporate affairs (MCA) has raised the existing cap of 26 per cent of the total post issue paid up equity share capital to 74 per cent of total voting power in respect of shares with DVRs of a company. 

Such shares have rights disproportionate to their economic ownership. In June, the Securities and Exchange Board of India (Sebi) had issued a framework for filing shares with DVRs.

“Indian promoters have had to cede control of companies, which have prospects of becoming Unicorns, due to the requirements of raising capital through issue of equity to foreign investors,” an MCA statement said.

Another key change brought about is the removal of the requirement of distributable profits for three years for a company to be eligible to issue shares with DVRs. “These amendments are certainly a welcome step. This will surely help promoters, especially start- ups, in raising capital without diluting their control over the company,” said Ankit Singhi, partner, Corporate Professionals.
The MCA statement said the initiative was in response to requests from innovative tech companies and start-ups and “to strengthen the hands of Indian companies and their promoters who have lately been identified by deep pocketed investors worldwide for acquisition of controlling stake in them to gain access to the cutting edge innovation and technology development being undertaken by them.” 

The government has also upped the time period within which Employee Stock Options can be issued by start-ups to promoters or directors holding over 10 per cent of equity shares, from 5 years to 10 years from the date of their incorporation.

Start-ups recognised by the department for promotion of industry and internal trade (DPIIT) will be able to avail of this provision. These steps are one of many taken by the government to woo start-ups. Recently, the income tax department has eased assessment norms for start-ups.