Government relaxes norms for shares with differential voting rights

Union Ministry of Corporate Affairs (MCA) has amended provisions relating to issue of shares with Differential Voting Rights (DVRs) provisions under Companies Act. This move is aimed at enabling promoters of Indian companies to retain control of their companies in their pursuit for growth and creation of long-term value for shareholders, even as they raise equity capital from global investors.

Key changes made are

The existing cap of 26 % of total post issue paid up equity share capital raised to 74 % of total voting power in respect of shares with DVRs of a company.

The earlier requirement of distributable profits for 3 years for a company to be eligible to issue shares with DVR now has been removed.

Alongside above two changes, time period within which Employee Stock Options (ESOPs) can be issued by Startups recognized by Department for Promotion of Industry & Internal Trade (DPIIT) to promoters or Directors holding more than 10% of equity shares, has been increased from current 5 years to 10 years from date of their incorporation.

Background

Promoters/founders who are instrumental in starting up company often lose control of firm when they dilute their stakes to raise multiple rounds of funding. Differential Voting Rights do not follow common rule of one share-one vote. DVRs enable promoters to retain control over company even after many new investors come in, by allowing shares with superior voting rights or lower or fractional voting rights to public investors.

Month: Current Affairs - August, 2019