Government eases norms for DVR shares

NEW DELHI: The government on Friday eased rules for issuing shares with differential voting rights (DVR), allowing those with special category shares to have up to 74% voting power, even if they hold only a small stake in the company.

The move meant to enable promoters — especially of startups — to retain control while raising growth capital. The amendments announced by the ministry of corporate affairs on Friday will also end ambiguity in the earlier rule, which had capped DVR shares at 26% of the post-issue equity capital, which was also interpreted by many as the ceiling on voting rights. “Now someone with 10% equity holding can have 74% voting rights if she holds DVRs,” said an officer.

The ministry of corporate affairs has also dispensed with the requirement of distributable profits for three years for a company to be eligible to issue DVR shares.



“These two initiatives have been taken by the government in response to requests from innovative technology companies and startups and to strengthen the hands of Indian companies and their promoters, who have lately been identified by deep pocketed investors worldwide for acquisition of controlling stake in them to gain access to the cutting edge innovation and technology development being undertaken by them. The government had noted that such Indian promoters have had to cede control of companies, which have prospects of becoming unicorns (valued at $1 billion), due to the requirements of raising capital through issue of equity to foreign investors,” an official statement said.

To benefit startups recognised by the department for promotion of industry and internal trade (DPIIT), the government has also doubled the time period within which employee stock options (ESOPs) can be issued to promoters or directors with over 10% stake to 10 years from the date of their incorporation.

While new companies can include DVR provisions in their articles of association (AoA) at the time of incorporation, those which have been registered will need to amend the AoA. The change in DVR rules came along with easing of norms by Sebi for listed companies. Officials explained that an unlisted company will now have to amend its AoA and wait for a year to take advantage of the relaxations ushered in for listed companies.