Stock Market

Net worth ceiling to keep unicorns away from DVRs

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Some of India’s largest startups could be ineligible to take the route for issuance of shares with differential voting rights (DVR) that was introduced by the market regulator Sebi in October, which mandated that DVRs can be issued by only those startups and technology companies where the collective net worth of the promoter group is less than ₹500 crore. Industry experts who ET spoke to said 70-80 per cent of the top 50 technology-driven companies will not be able to meet the net worth threshold specified by the market regulator.

Currently, there are more than 20 startups in India valued at over $1 billion (₹7,200 crore). The issue becomes even trickier for those startups where strategic investors like global private equity funds are part of the promoter group of those companies.

Since the Sebi regulations consider the collective net worth of promoter group, the net worth of the PE funds, too, has to be considered for calculation. Global PE funds like Soft Bank or Tiger Global have billions of investments across the world and hence even though the founder promoters of the company may have net worth less than ₹500 crore, the collective net worth will breach the ceiling specified by Sebi. “The collective threshold of ₹500 crore seems to be on the lower side in situations where a widespread promoter group or involving successful entrepreneurs supporting the new venture,” said Moin Ladha, partner, Khaitan - Co.

“This approach clearly indicates the intention of the regulator to allow entrepreneurs with limited resources to be able to raise capital for their startups without diluting their capacity to control.” DVRs are shares of a company that entitle the holders to higher rights.

In some cases, DVRs carry superior voting rights while in others they carry superior rights in terms of dividend payouts.

Startups use the route to raise capital without having to give up control of the company. “Essentially, what’s being said is that for none of the unicorns the promoters should have DVRs.

These things matter when companies scale up, and as companies scale up you want the domestic founders to be in the driver’s seat,” said Prashant Tandon, co-founder and CEO of 1MG Technologies. Restricting the Indian DVR market to smaller startups through the net worth ceiling assumes significance since globally the route has been extensively used by the big-ticket technology companies.

For instance, Mark Zuckerberg along with handful of other insiders own 18 per cent of the equity in Facebook. However, unlike normal shares of Facebook, each share owned by Zuckerberg carries 10 votes.

Effectively, the group owns 70 per cent of the voting rights.

Similarly, social media firm Snapchat used the model during its initial public offering (IPO) in 2017.




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