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The markets regulator on Thursday put out a consultation paper seeking comments on its superior voting rights (SR) framework after market participants highlighted several concerns.

The Securities and Exchange Board of India (Sebi) introduced the framework in 2019 to enable technology startup founders who typically own small shares in their companies because raising large sums of capital is needed to scale up and results in the founders stake getting reduced substantially.

The framework was aimed to allow founders of these tech startups to retain control of their companies after they started trading publicly.

The plan to review these norms comes as many Indian technology startups, backed by venture capital, are gearing up to go public, and many more are expected to follow suit. Among the companies that are planning to go public are Zomato, Paytm, Flipkart and Byju’s.

“Sebi has received feedback from market participants on the current requirement that an SR shareholder shall not be part of the promoter group whose collective net worth is more than 500 crore is too onerous to comply and is keeping prospective SR shareholders away from utilizing the SR shares framework," said the consultation paper.

The regulator has also sought comments on the issuance of SR shares to trusts or entities on behalf of founders and/or promoters in executive positions.

“The rationale for granting SR shares only to promoters/founders was to reflect on these individuals’ unique and significant contribution to the present and future prospects of a business. In the prospective issuer companies, the shareholding of founders/promoters may be structured through either holding companies or family trusts or limited liability partnerships (LLPs). It is argued that this is done mostly for the purposes of operational efficiencies, long-term succession planning and tax planning," the paper said.

However, the current regulations would require the unwinding of such structures to enable direct holding of SR shares by founders, Sebi noted.

This may have various implications, including from a taxation perspective, and may even impact the ability of the issuer company to make an offer for sale in the share sale, it said.

In the consultation paper, Sebi noted that allowing trusts, limited liability partnerships, and holding companies to hold SR shares raises concerns as such vehicles may have ineligible non-SR shareholders as beneficiaries or as shareholders.

“Some of these structures such as trusts are opaque in nature and make it difficult to identify wherein the voting power arises," it said.

The markets regulator has also sought comments on whether the requirement of holding superior voting rights shares for six months prior to the date of red herring prospectus should be deleted as it received feedback from market participants that the requirement is onerous and delays such issuer companies from raising funds from the capital market.

ABOUT THE AUTHOR
Swaraj Singh Dhanjal
" Based in Mumbai, Swaraj Singh Dhanjal is responsible for Mint’s corporate news coverage. For the past eight years he has been writing on the biggest deals in private equity, venture capital, IPO market and corporate mergers and acquisitions. An engineer and an MBA, he started his journalism career in 2014 with Mint. "
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