New Delhi: The Union government on Friday liberalized rules that would allow Indian companies to raise share capital without diluting the voting rights of all existing shareholders. The move is expected to help promoters retain control when they raise capital from new investors.
The changes are expected to benefit India Inc., particularly startups, which will be able to attract more capital, but without ceding control.
The ministry of corporate affairs said it has amended provisions of the Companies Act relating to the issue of shares with differential voting rights (DVRs). This, it said, was to allow promoters of companies to “retain control even as they raise equity capital from global investors".
Prior to the amendment, the Companies (Share Capital and Debentures) Rules of 2014 allowed the issue of shares with differential voting rights, subject to riders—the business should have distributable profits for the previous three years, and the capital raised through shares with differential voting rights must not exceed 26% of the post issue capital.
The amendment has also done away with the condition of having three years of distributable profits and raised the cap, said the statement. A copy of the amended rules was awaited at the time of publishing this report.
Differential voting rights also allow investors to take a substantial stake in a company and be a financial investor without voting rights, crossing a threshold that may mandate an open offer.
On 18 July, Mint had reported on the government’s plans to liberalize the rules on DVRs as part of its 100-day agenda to ease the rigours of compliance faced by companies and to enable them to raise capital without diluting voting rights. Raising funds through this route will help companies keep the cost of capital low.
The Securities and Exchange Board of India, or Sebi, had issued a discussion paper on the subject earlier this year. Subsequently, it cleared the framework for listed companies in June. Companies Act and rules apply to all companies, while Sebi requirements apply to listed companies.
Allowing businesses to access capital easily and at a lower cost was a key demand of the industry at a time the government is under pressure to revive a slowing economy.