Changes in DVRs to boost the start-up ecosystem
The recent regulation from the ministry of corporate affairs (MCA) has raised the existing cap of 26 per cent of the total post issue paid up equity share capital to 74 per cent of total voting power in respect of shares with DVRs of a company.
This move would help the founders to raise capital without losing control. “Right now, the law was coming in the way but now law will provide an enabling environment and the founder will be free to negotiate commercially.
This move will also help certain start-ups raise funds and will also able to issue shares with differential voting rights (DVRs), with this it will help entrepreneurs to retain control even as they raise equity capital from global investors.
Now onwards, Promoters of Indian companies can now issue a much larger proportion of shares with such rights, helping them retain control over their companies even as they raise equity capital from investors. Secondly, another key change is the removal of the earlier requirement of distributable profits for three years for a company to be eligible to issue shares with differential voting rights, the ministry said in a release.
With this there are two changes to be expected to boost the start-up ecosystem. It is also meant to strengthen the hands of Indian companies and their promoters, 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 technology development.
Lastly, the changes are especially beneficial for the start-up ecosystem. Now the companies can enhance the capital base without compromising on the management, the changes would help the promoters raise capital through equity but still have control of the company.