IndiaTech suggests steps to strengthen rights of founders at 'high-growth' startups
IndiaTech, a domestic lobby for technology-focussed companies and investors, has submitted proposals to the capital markets regulator and multiple government departments seeking to bolster the rights of Indian promoters and founders of high-growth’ internet companies.
The lobby has also sought easier listing norms for Indian technology unicorns and companies of scale in recommendations submitted last week to the Securities and Exchange Board of India (SEBI), Department for Promotion of Industry an Internal Trade (DPIIT), Ministry of Commerce, NITI Aayog and Ministry of Corporate Affairs.
Members of the lobby group, which include technology companies like Ola, MakeMyTrip and investors such as Steadview Capital, Matrix Partners and Kalaari Capital, have also spoken about protecting Indian founders and promoters in the event of acquisitions or investments from foreign firms.
According to a copy of the submissions reviewed by TechCircle, firms are classified as High Growth Technology Companies (HGTC) if they have been in existence for a minimum of four years and have consolidated gross revenues of at least Rs 500 crore in the most recent fiscal. These companies are defined as entities involved in developing technology or intellectual property or using internet and technology.
The submissions recommend that the MCA should allow promoters of these companies to convert ordinary shares into equity shares carrying differential voting rights (DVR) and vice versa to make it easier for promoters to introduce a dual-class equity share structure. Currently, this is not allowed.
A dual-class share structure allows a handful of shareholders, usually promoters and founders, to have greater voting rights in comparison to their equity share capital. This structure is followed in companies like Facebook, Google and other global majors where promoters exercise greater control over the company despite a capitalisation table comprising multiple investors.
IndiaTech has asked for increasing the cap on shares with DVR from 26% to 51% of post-issue paid-up capital, citing precedents in NASDAQ and NYSE. In India, a listed entity is required to have distributable profits for three years consistently to issue shares with DVR.
In December, the Securities and Exchange Board of India (SEBI) had set up a sub- committee to review norms on dual-class shares by examining global models followed for differential voting rights.
Around the same time, SEBI had also relaxed norms for listing startups on the ‘Innovators Growth Platform’, formerly known as Institutional Trading Platform. This was done after a public consultation by SEBI for ease of listing of startups. The new norms also did away with the cap of 25% holding for an individual or group in company’s post-issue capital to encourage investors to participate.
However, these norms do not work for high-growth companies, said IndiaTech chief executive officer Rameesh Kailasam.
“Most of the companies under the classification include Indian unicorns. They cannot list on the public platform despite a critical mass as they do not own assets and are different from traditional companies,” he said.
The IndiaTech submission also asks for an exemption of minimum promoters’ contribution requirement under Regulation 14 of SEBI Regulations, 2018.
Apart from these provisions, the submission has also recommended that such companies be allowed to confidentially file draft offer documents with SEBI to “avoid public disclosure of sensitive commercial and financial information to the market and to competitors.”