What the new norms for DVR shares mean for corporate India
DVR shares have been around in India for over 10 years now with companies like Tata Motors, Jain Irrigation, NRE Coke and Future Group having issued such shares. Differential Voting Rights (DVR) shares offer a means to raise capital without diluting control. That is something that has come to the fore after the Mindtree case where founding promoters with just 10% stake in the company had to cede control to L&T despite their best efforts. DVR shares could have saved the day for them in such circumstances. On 16th August, the government issued new norms for DVR shares, which can help this instrument become more meaningful.
Majority voting control
One of the reasons most promoters did not relish the idea of DVR shares in the past was that the total proportion of DVR shares could not exceed 26%. That means promoters would be vulnerable to external takeover attacks. Now that limit has been raised from 26% to 74%. That means; companies will be allowed to issue up to 74% of the voting rights to the existing promoters even if the actual share of capital they own is just 10%. This will be a big boost for start up businesses and small entrepreneurs to raise capital for their business expansion without worrying about dilution of their stake. We saw forced dilution in Flipkart and loss of control in case of Mindtree. Both situations could have been avoided with DVRs.
No track record needed
One of the unsustainable conditions of the current DVR regulations was that the company needed to have a 3 year track record of profitability to be eligible for the issue of DVRs. That would have kept most start ups out of the eligible list because typically start-ups sink loads of capital into the company before they can even think of becoming profitable. Now that requirement is scrapped as per the latest announcement made on 16th August. Now, companies do not need a track record of 3 years of profits to be able to issue of DVR shares, which will again come as a boon. One more change is relevant. Currently, higher voting shares can be issued as ESOPs to promoters only within 5 years in case of start-ups. Now that has been relaxed to 10 years, which is more realistic looking at the gestation in start-ups.
Creating the DVR market
Of course, the biggest challenge will be to have an interesting story for the investors to buy into. Normal stocks without voting rights will not be exciting to investors unless other sweeteners are thrown in. A semi-convertible structure would work better where there is a fixed payout for some time before it is converted into equity. That should interest a lot of institutions. Once the regulation is done and dusted, the next challenge is to get the market excited. That is, of course, the next step!