Will Superior Voting Rights boost domestic listing of tech startups?

With high-profile start-up IPOs planned in the coming months, the regulatory framework for issuing shares and the powers of promoters is also in the spotlight.

Often start-ups that raise a lot of external capital end up diluting shareholding of promoters, and thereby their voting rights. India introduced ‘superior voting right’ shares in 2019, which companies issue to promoters and key executives. These special shares have a higher voting power than ordinary shares. Let’s understand how these shares work.

What SVR shares do

Super-voting shares give key company insiders greater control over a company's voting rights, its board, and corporate actions. The existence of super-voting shares can also be an effective defence against hostile takeovers, since key insiders can maintain a majority voting control of their company without actually owning more than half the outstanding shares.

On September 28th, the Securities and Exchange Board of India eased certain rules. It allowed startup founders with a personal net worth of up to 1000 crore rupees to get superior voting rights shares. The cap for eligible persons earlier was 500 crore rupees, and this was only for those in executive positions.

Will Sebi’s olive branch spur domestic listings, at a time when top players like Nykaa, PolicyBazaar, Oyo and Paytm are set to launch their initial public offerings. It is a divided bench. 

Superior voting right shares do not subscribe to the dictum of one share, one vote. They have from 3-is-to-1 to 10-is-to-1 voting rights ratio.

While these shares are a relatively new concept in India, the sale of such shares is allowed in countries like the US, and closer home in Hong Kong and Singapore. Facebook founder and CEO Mark Zuckerberg, for instance, has managed to keep control of the social media network by issuing such shares, carrying 10 votes each, to himself and his associates. By comparison, each public shareholder has just one vote.

Another notable example is that of Google and its parent entity Alphabet. The company has three different classes of shares – Class A, Class B and Class C.

Class A shares have one vote per share, Class C has no vote, and class B has 10 votes per share. Class B shares are given only to top executives and early investors. Class A and Class C shares trade on the Nasdaq.

In 2019, after much persuasion, Sebi had introduced the concept of superior voting rights in India. It had allowed a certain class of start-ups – those working on innovative technology – to issue these shares. But it didn't take off due to some onerous demand and a whole lot of regulatory grey area.

Previously, Sebi had defined eligible executives as promoters or a promoter group entity with less than 500 crore rupees net worth. Market participants complained that this was too onerous and kept prospective superior voting rights shareholders away from utilising the framework.

Moreover, the definition of promoter and promoter group was too broad. This led to a situation where the net worth of the relatives of founders was included. Further, promoter groups could be holding companies, registered family trusts and partnerships – causing further confusion.

The most significant change that has come now is that net worth of the promoter in consideration doesn’t include the value of shareholding in the said start-up.

The idea is that tech founders with marginal shareholding but executive positions would be able to manage the affairs of their companies better after listing. Without differential voting rights, startup founders had greater incentives to list abroad. 

However, only time will tell if new start-ups exercise this option.