Start-up moguls fete Sebi framework on differential voting rights

Start-up entrepreneurs in India, who have for long been demanding introduction of differential voting rights to fend off any hostile takeover attempt or succumb to pressure from powerful investors, have welcomed the decision of the market regulator Securities and Exchange Board of India (Sebi) to introduce a framework on this.

Sebi on Thursday issued a new framework for issuing differential voting right shares by tech companies with effect from July 1. This is also expected to make the process easier for promoters of such companies to go in for an initial public offering (IPO).

“Welcome Sebi’s move to allow differential voting rights for Indian tech companies. I’m certain this will encourage Indian companies to list within the country, backed by our own people,” Bhavish Aggarwal, co-founder and chief executive officer of homegrown ride-hailing company Ola, said in a tweet. “Made in India businesses and entrepreneurs can control their destiny and build for the world,” added Aggarwal, whose firm counts Japanese tech giant SoftBank among its top investors.

“Overall, we welcome the move by Sebi to approve the framework on differential voting rights for start-ups,” said Harshil Mathur, chief executive and co-founder of payment solutions company Razorpay, which this month raised funding of $75 million, led by venture capital firms, Sequoia India and Ribbit Capital, along with participation from Tiger Global and Y Combinator. 

According to the new framework issued by Sebi, a company having superior voting rights shares would be permitted to do an IPO of only ordinary shares to be listed on the main board. The framework is applicable for tech companies, which Sebi defines as ‘innovators growth platform’. These include firms which are intensive in the use of tech, information technology, intellectual property, data analytics, biotechnology or nanotechnology to provide products, services or business platforms with substantial value addition.

Ankur Pahwa, partner and national leader, e-commerce and consumer internet at EY India, said Sebi’s initiative basically puts Indian founders on a par with entrepreneurs in regions such as the US where founders have differential voting rights and retain control over the company, even as they continue to raise external capital. Some of these companies include ride-hailing firm Lyft and social-media giant Facebook. “By having differential voting shares, founders keep control and it is easier to exercise vision and take companies to the IPO,” said Pahwa.

Madhur Singhal, managing director at consulting firm Praxis Global Alliance, said tech companies are powered by the ideals of the entrepreneur and it is in everybody’s interest to keep the entrepreneur involved. “Having differential voting rights allows founders and management teams to get investors more flexibility,” said Singhal.

A differential voting right to founders helps them to have a critical say in the various strategic direction of the company such as mergers and acquisitions, and fundraising, among others. The issue of differential voting right came to the fore when tech entrepreneur Sachin Bansal exited Flipkart after Walmart acquired a majority stake in the company in a multi-billion dollar deal, rather unceremoniously.