The proposals have the potential to help founders dilute stakes without losing control, make tax structures more efficient and help in succession planning.
Top-tier startups such as Paytm, Zomato, PolicyBazaar, Nykaa and Delhivery, which are expected to complete their Initial Public Offerings this year are, however, unlikely to get the benefits as the proposals are still at the consultative stage.
The capital markets regulator has given industry stakeholders time till July 30 to submit their feedback.
Issuing SR shares is a relatively new concept by Indian companies proposing to list on the capital markets. These shares confer higher voting rights to promoters than lay investors and founders of major US firms like Google, Facebook, Snap Inc and Lyft hold such shares despite going public.
Sebi had unveiled guidelines for SR shares in 2019 and the latest proposals are aimed at taking another look at the same.
The regulator is considering some relaxations such as doing away with timelines for founders to issue SR shares before an IPO. Currently, founders should issue SR shares six months before going public.
“Sebi has received feedback from market participants that the requirement is onerous, which delays such issuer companies from raising funds from the capital market,” the regulator said in its latest paper.
Key Concern
Sebi is also reviewing a clause that says an SR shareholder cannot be a part of the promoter group whose collective net worth is more than ₹500 crore.
This is ‘too onerous’ to comply with and is keeping prospective SR shareholders away from utilising the SR shares framework, it said.
One key concern regarding this clause is that family members of SR shareholders may also hold stakes in the company and such investments – as per current rules — would not be excluded while computing the collective net worth of the SR shareholder.
An entrepreneur who runs a fintech startup termed Sebi’s proposals as ‘progressive’.
“The SR rules earlier helped founders retain control over startups even when their stakes got diluted in equity rounds. The new clarifications are meant to offer further impetus to SR shareholders, especially for those startups looking to go public. It ‘s a welcome step,” the entrepreneur said.
IndiaTech, an industry association working closely with startups on issues including SR shares, said Sebi’s reconsideration of clauses such as net-worth and timing of SR issuance is encouraging for the startup and tech ecosystem.
“While our recommendations around sunset clause for a period of 10 years plus 5 years post IPO is still to be considered, it (SR shares proposal) will be significant for the growth of any company in terms of operations, maintaining profitability, serving its investors and ensuring stability in management, especially for high-growth technology companies,” said Rameesh Kailasam, CEO of IndiaTech.
The proposals will strengthen founders’ rights, said Shinoj Koshy, partner, L&L Partners.
But “unfortunately these proposed relaxations undermine all the various safeguards that were introduced by Sebi following the public consultation on SRs/DVRs (differential voting rights) in 2019”, Koshy added.
