The government has made crucial changes in the law that will permit Indian companies to issue majority shares with differential voting rights (DVRs).

Govt eases norms allowing startups to raise funds while retaining control of companyImage for representation
Atom Startups Saturday, August 17, 2019 - 17:56
Written by  S. Mahadevan

In a bid to make things easier for startups in the country, the government has announced relaxation in the DVR (differential voting rights) norms. The government has lifted the ceiling for DVRs from 26% to 74%.

This means that the promoters of startups can sell their stakes in their companies to those investors who are not keen on getting involved with the day to day functioning of the startup and therefore accept a situation where their voting rights when it comes to key decisions won’t be commensurate with the amount they have invested or the percentage of their holding in the company. Such investors could be typically overseas investors.

The government must have reacted on the feedback being received from the market that there are startups which are otherwise doing well but are being put under increasing pressure from the investors to toe their line in the way the company is run. Like it happened with the Bombay Club some years ago, a lobby of Indian startup entrepreneurs has been voicing its concern that deep-pocketed investors first lure these promoters with huge investments in their companies and after a few rounds of fund raising when the promoter (s) are left with a minority stake, the investors start blocking key initiatives at the decision making level.

By opening up this avenue to tap funds abroad by startups and issuing investors with differential voting rights, the government has made sure the startups remain funded without compromising on their management control. Out of experience, the promoters are aware that such funds are easier to tap overseas and this relaxation must be seen in that context. This has been implemented through fresh amendments in the Companies (Share Capital & Debentures) Rules of the Companies Act of 2013. The amendment also permits companies that have not made profits for three years to access these funds. This was a requirement earlier.

The other alteration brought about in the laws governing startups is that the companies that want to issue employee stock options to their promoters holding more than 10% can now take more than 5 years to do so. The present law stipulates that such ESOPs can be allotted only for 5 years from incorporation. It has now been made 10 years.

Become a TNM Member for just Rs 999!
You can also support us with a one-time payment.