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Indian Economy

Policy Reforms for Startups

  • 17 Aug 2019
  • 2 min read

Recently, the Ministry of Corporate Affairs has brought a slew of policy reforms to promote India's startup environment.

  • The move is likely to help start-ups raise funds, while allowing promoters to retain control over their companies.
  • It removed the earlier requirement of distributable profits for three years for a company to be eligible to issue shares with differential voting rights.
  • Indian companies are now allowed to issue more shares with Differential Voting Rights (DVR).
    • The revised cap on differential voting rights shares is raised to 74% of the total voting power from the existing 26%.

Differential Voting Rights (DVRs)

  • Promoters or founders of a start up, often lose control of the firm when they dilute their stakes to raise multiple rounds of funding. This issue can be resolved by Differential Voting Rights (DVRs).
  • A DVR share is like an ordinary equity share, but it does not follow the common rule of one share-one vote,
  • It enables promoters to retain control over the company even after many new investors come in, by allowing shares with superior voting rights or lower or fractional voting rights to public investors.

Significance

  • Earlier, due to the requirement of raising capital by issuing equity to foreign investors.,Indian promoters have had to cede control of their companies.
    • Some of which had prospects of becoming Unicorns (startups that have a market valuation of at least $1 billion).
  • These two changes are expected to give a boost to the start-up ecosystem.
  • It will also strengthen Indian companies, who have lately been targeted by deep-pocketed global investors for acquisition of controlling stakes in order to gain access to their cutting-edge innovation and Indian market.
    • For example Flipkart's take over by Walmart in 2018.

Source:THBL

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