Background: The Ministry of Corporate Affairs by its recent amendment has eased out rules pertaining to shares with Differential Voting Rights (DVRs). This can be seen as an attempt to bolster start-ups by allowing them to retain control over their companies ‘even as they raise equity capital from global investors.’
Existing framework– The Companies (Share Capital and Debentures) Rules, 2014, is the set of rules that quantitatively and materially lay down the provisions relating to issue of share capital and debentures along with its procedural requirements.
Legal Update– The notification makes changes in Rule 4, sub-rule (1), clause(c) wherein the existing cap of 26% of the total post issue paid up equity share capital has been increased to 74% of total voting power in respect of shares with Differential Voting Rights of a company. Another cardinal change is in regard to Clause (d) which mandated the company to have ‘consistent track record of distributable profits for last three years to be eligible to issue shares with DVRs. The amendment has deleted this clause.
In Rule 5, sub-rule (3) the word “director” has been substituted with the words “director or company secretary”.
In Rule 12, which talks about issue of employee stock options and spells out guidelines for a company, other than a listed company, which is not required to comply with SEBI Stock Option Scheme Guidelines, to offer shares to its employees under a scheme of employees’ stock option (ESOP). Herein the explanation made it clear that the conditions of sub clauses (i) and (ii) under this rule would not apply to start-ups up to five years from the date of its incorporation or registration. The amendment has extended this time limit to 10 years.
Key Inference: With the amendment seeing the light of the day, the biggest gainers would be the promoters of small and medium scale Indian companies and start-ups, as they can now retain control over their companies which they earlier had to surrender in order to cater to the requirements of raising capital through issuance of equity to investors. It also loosens the provisional requirements in relation to issue of shares with DVR which would be a boon for start-ups. Thus in the pursuit of growth and furtherance of business, dilution of power would not be the only way out.
September 16th, 2019