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Govt raises ceiling for differential voting rights to 74% from 26%

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The government lifted the ceiling for differential voting rights (DVRs) to 74% of their paid-up capital from 26% after the Ministry of Corporate Affairs made amendments to the Companies (Share Capital & Debentures) Rules of the Companies Act on August 16, in a move that is being seen as a fillip to startups. The requirement to distribute profits for three years for a company to be eligible to issue shares with DVRs has also been removed following the amendments. “Indian promoters have had to cede control of companies, which have prospects of becoming Unicorns, due to the requirements of raising capital through issue of equity to foreign investors,” MCA said in a statement.

Apart from that, the government has also increased the time period within which Employee Stock Options (ESOPs) can be issued by start-ups to promoters or directors holding over 10 per cent of equity shares, from 5 years to 10 years from the date of their incorporation. Start-ups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) will be able to avail of this provision, MCA said in its statement.

DVR shares, as their name suggests, carry disproportionate voting rights as compared to their economic ownership and thus go against the principle of one share, one vote. They can carry superior voting rights (more than one vote per share) or fractional voting rights (less than one vote per share), or simply have differential rights as to the dividend. They are popular with founders and promoters of start-ups as they help them retain control over the company’s decisions while also raising funds from the market.

This development comes after markets regulator SEBI had in July issued a framework for certain technology companies to issue differential voting rights (DVR) shares from July 1, making it easier for the promoters of tech start-ups to go in for initial public offerings. Among other proposals, it had proposed that the total voting rights of shareholders (including ordinary shares), should not exceed 74%.

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