Technology Entrepreneurs lobbies for dual-class share structure
27th, February 2019 - Startup community
An industry grouping representing India’s top internet entrepreneurs has approached the government seeking a dual-class share structure along with differential voting rights for founder-promoters of startups that could encourage the country’s most valuable companies to list on the domestic stock exchanges.
In a proposal submitted to the ministry of corporate affairs (MCA) and markets regulator Securities and Exchange Board of India (Sebi) last week, advocacy group IndiaTech, which counts the Bhavish Aggarwal-led Ola and Deep Kalra’s Make-MyTrip as members, said the move will allow founders of India’s largest startup ventures to retain control over their companies and also push them to list on national bourses instead of overseas exchanges, such as Nasdaq and the New York Stock Exchange.
Proposal on Enabling Framework
IndiaTech has proposed that MCA should consider permitting firms without having a consistent track record of distributable profits to issue shares with differential voting rights (DVR). Alternatively, MCA should consider allowing companies meeting certain revenue threshold to issue shares with differential rights without having to specifically meet the profitability criteria.
Proposal also includes raising the current cap on shares with differential rights to at least 51% of a company’s post-issue paid-up equity share capital. The lobby group has also sought conversion of ordinary shares into equity shares carrying DVRs, and equity shares with DVRs into ordinary shares.
The ministry will be required to change the enabling framework before Sebi could come up with any new rules specific to listed firms. Sebi did not reply to ET’s queries on IndiaTech’s proposal until press time.
For Indian startups, the need for a framework that protects founders’ rights has emerged as a hot-button issue as more firms cross the $1-billion valuation mark at a rapid pace.
THE UNICORN CLUB
The most recent to join the unicorn brigade is ed-tech venture Byju’s. India currently boasts of 17 such startups. Private limited companies do not have any restrictions on DVRs.
However, founders at several unicorns have a shareholding in the single-digit to low double-digit range while investors, including some of the biggest strategic and financial backers globally, own between 26% and 50% of the stock.
Legal experts are of the view that as current regulations in India do not allow for dual-class share structure after listing, founders are finding it difficult to drive the direction of the company. “The current regulatory landscape does not allow for dual-class share structure after listing, which is why a lot of founders are finding it difficult to drive the direction of the company post listing because they typically end up being minority shareholders after multiple rounds of fund-raising,” said Sharad Moudgal, partner at law firm Khaitan & Co, said. Dual-class share structures and DVRs are common in the US and China. Facebook’s Mark Zuckerberg, Alibaba Group’s Jack Ma, and Under Armour’s Kevin Plan, among others, have adopted DVR structures.
Typically, a dual-class structure is one where a founder holds a significantly higher percentage of voting rights in comparison to share of equity capital. Moreover, in the markets such as the US, Hong Kong and Singapore, equity shares carrying ordinary voting rights are listed on the stock exchanges and the equity shares carrying superior voting rights remain unlisted.
In India, a listed entity is required to have a consistent track record of distributable profits for three years to issue shares with DVRs
But the cap on issue of shares with DVRs is 26% of the total post-issue paid-up equity capital. Also, firms cannot convert shares carrying voting rights into shares with differential voting rights and vice-versa.
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