India’s Tech Startups lobby

A group called IndiaTech consisting of major Indian startups like Ola, Makemytrip etc has been lobbying with the Indian government to push for interests of local entrepreneurs and tech startup companies.

The group was previously headed by Gyanendra Badgaiyan, a former IAS officer and an economist who has held several posts within the government over the years. He resigned later on because he wanted to diversify the actions of this group into various sectors and form think-tanks, something the founders were not too keen on. They later appointed Rameesh Kailasan, a reform and policy strategist, as their CEO.

Flipkart’s Sachin Bansal envisioned IndiaTech with a view to serve local tech startups and create an equal ground in the Indian market with regards to global competitors by pressing to create favorable laws which protect their stakes.

According to those familiar with the group’s views, the group behind Indiatech believes that if home-grown Internet firms do not succeed, India will likely lose $10 Bn of FDI per year, $1 Bn of tax revenues per year and a million jobs that could have been created based on the numbers extrapolated from China.

The group, in its proposal submitted to the Ministry of Corporate Affairs (MCA) and Securities and Exchange Board of India (SEBI) made the following appeals :

  • Allow companies to issue shares with Differential Voting Rights (DVR) by meeting a specific threshold for revenue instead of meeting the current demand of having a consistent track record of distributable profits over a period of 3 years.

Differential voting rights (DVR) are like ordinary equity shares, except that the DVR shareholder has fewer voting rights as compared to the rights of an ordinary shareholder. DVR has been employed by the likes of Tata Motors and Future Retail to enable the founders to retain control of the company even if they have a minority stake.

  • Lifting the current cap on shares with differential rights from 26% to at least 51% of the total post issue paid-up equity share capital of the company.
  • Permitting conversion of ordinary shares to equity shares with DVRs and vice-versa.

This would lead to a dual-class share structure in India, similar to that in USA and China, enabling promoters to possess greater control over the company. 

“The reexamination of DVRs on account of the rise of the tech companies, for whom the DVR structures offer several advantages will enable promoters to undertake innovation and risk without being affected by dilution and provide an effective defence against hostile takeovers,” said Vaibhav Kakkar, partner-regulatory practice at law firm, L&L Partners.

This will let Indian entrepreneurs to gain large amounts of investments and capital without losing control of the company. This has been a pressing issue for all the startups as the founders and promoters are left with only a minority stake in the company after the completion of successive rounds of raising capital from investors which leads to reduced voting rights for them. 

Hence, a new system and framework for separation of ownership and control is needed to address the following concerns. The regulations should be created by keeping in mind what is it that we are trying to protect.

Most of these companies, marketed as Indian and pushing for such regulations, are majorly owned by foreign investors. Also, their Indian-ness is conveniently being used to tap into a massive Indian market before their direct global rivals to gain monopoly and control over the market. However, India is many nations merged into one and with regards to business conducting environment, it is imperative to enable an atmosphere of competition which would lead to differential price models enabling larger connectivity leading to creation of added consumers joining the system as the wealth gap in India clearly suggests.

Therefore, we need to understand the ‘sensitive’ nature of our startup companies in their varied and interchangeably disruptive manner to formulate policies which regulate their actions by defining ‘control’ and ‘critical infrastructure’.

The definition of Critical Infrastructure varies from nation to nation but to distinguish and identify them simply, they can be divided among definitions by developed countries and definitions by developing countries to better link it within the broad spectrum of our country.

Source: OECD May 2008 report on Protection of ‘Critical
Source: Quint

This would help us find that innate Indian-ness being claimed by those other companies and establish a system around it.

Finding ways to retain control is the entire issue for these companies and their founders. Hence, control should be seen through the lens of volatile and exponential nature of these companies and not lazily adapt already existing models in different industries.

There are multiple definitions which vary by regulator – Securities and Exchange Board of India, Competition Commission of India, Foreign Investment Promotion Board, and Insurance Regulatory and Development Authority of India, to name a few. There is an excellent discussion paper by SEBI which summarizes the various definitions and the global position. Control has been variously defined as the right to: 1. Appoint a majority of the board of directors 2. Control management 3. Control policies. Further, the right can be derived from ownership (shareholding), management rights, shareholders agreement, voting rights and contracts.

These companies and entrepreneurs working to establish themselves as pioneers in the Indian Silicon Valley for future Indians, should work accordingly and focus on strengthening the planning and communication within the company to ensure shrewdness rather than diluting their companies to meet the next round of requirement for raising capital leading to cash reserves being used in wasteful manner. Conclusively, it’s necessary to strike a balance.

Sources: Economic Times, Inc42, Bloomberg Quint, Tech Circle

Image Sources: Bloomberg Quit, Tech Story

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