SEBI’s proposal boost IPO-bound founders’ rights

The market watchdog, SEBI, has proposed to mellow down rules imposed on superior voting rights shares (SR shares). This move could resolve some of the legacy issues faced by start-up founders when planning to list their companies publicly.

The proposal, when realised, will enable founders to dilute their stakes without losing control. It will improve succession planning and make the tax structure more robust.

Capital market regulators have asked industry stakeholders to submit their feedback on the proposals by July 30 2021.

So, what exactly are these SR shares?

The SR shares extend higher voting rights to promoters and not lay investors. These shares can be issued to founders not belonging to any non-promoter group whose aggregate net worth exceeds Rs. 500 crores.

Check out the major highlights of SR share proposals!

This March, SEBI decided to simplify the process of IPO for start-ups. To do so, the regulatory body eased the Innovators’ Growth Platform’s listing rules.

Although SR share issuance is a nascent concept in India, it’s a widely used instrument in countries like the US. Major US firms such as Snap Inc, Google, Lyft, and Facebook continue to hold these shares even after going public.

Note that SEBI had already unveiled guidelines for superior voting right shares in 2019.

Then what are the latest proposals all about?

The new proposals aim to offer a fresh perspective on the core topic. Here are some of the major highlights of the latest recommendations –

• Key areas in the existing framework that could change include promoters’ net worth requirement, eligible structure for share issuance, and minimum holding period.
• Presently, founders are required to issue SR shares at least 6 months before going public. However, the regulator plans to suspend this timeline for founders.
• SEBI has asked stakeholders for feedback on whether holding companies, partnerships, or registered family trusts – wherein founders/promoters are sole trustees – should be allowed to hold SR shares until they leave the executive position in the issuing company.

Top-tier start-ups, including Zomato, Delhivery, Paytm, Nykaa, and Policy Bazaar, are set to complete their IPO in 2021. However, since the proposals are at a consultative stage, it is unlikely that these start-ups will benefit from them.

What are the key concerns that could be addressed?

Some of the major concerns that could be addressed include –

• Old safeguards are now being looked at as ‘too onerous’ for founding entities
• The clause regarding the SR holder and their family’s membership in a promoter group when net worth is over Rs. 500 crores

However, the recommendations concerning the sunset clause are yet to be reconsidered. There is hope that the new proposals would prove helpful for –

• Company’s operational growth
• Profitability
• Stability in management

Then again, the proposed relaxations could undermine previously imposed safeguards, which were brought into force after SEBI’s public consultation on SRs and DVRs in 2019.

Final takeaway

SEBI’s reconsideration clause involving the company’s net-worth and timing of issuing SR shares can be potentially beneficial for start-ups and the tech ecosystem. Now, how companies perceive these proposals will become evident only after they share their feedback.

Frequently asked questions

What is Innovators’ Growth Platform?

Previously known as the Institutional Trading Platform (ITP), SEBI introduced it to facilitate the listing of start-ups and growing companies.

What is the purpose of a fresh public consultation?

Clauses previously introduced as safeguards are now perceived as too onerous for founders. Accordingly, fresh public consultation will offer SEBI the necessary insight to devise favourable safety nets for stakeholders.

What are DVR shares?

Differential voting rights or DVR shares are similar to equity shares. However, they extend differential voting rights to their holders. Companies issue DVR shares to prevent a hostile takeover, dilute voting rights, or include passive strategic investors.