Return of DVRs

By Santosh Pai and Anuj Trivedi, Link Legal India Law Services

Why has this development been welcomed by Indian startups and their investors?

In June 2019, the Securities and Exchange Board of India (SEBI) permitted the issuance of shares with ‘differential voting rights’ (DVRs) by listed technology companies, i.e., companies making intensive use of technologies to provide products, services or business platforms with substantial value addition. So far there is no clarity on what is “intensive use of technology” but it is safe to assume it will cover information technology, data analytics, biotechnology or nano-technology.

Santosh Pai
Link Legal India Law Services

To be clear, DVRs are not entirely new to India. This concept was first introduced in 2000, when companies were allowed to issue shares with both superior and inferior voting rights. However, in 2009, issuing shares with superior voting rights by listed companies was disallowed by SEBI, while issuing shares with inferior voting rights continued to be permitted.

For unlisted companies, the Ministry of Corporate Affairs (MCA) in August 2019 amended the provisions of the Companies Act, 2013 relating to the issue of shares with DVRs with the main objective of enabling promoters of Indian companies to retain control of their companies in their pursuit of growth and creation of long-term value for shareholders, even as they raise equity capital from global investors.

The MCA has raised the previously existing cap of 26% of the total post issue paid up equity share capital to a revised cap of 74% of total voting power in respect of shares with DVRs of a company by making amendments to the Companies (Share Capital & Debentures) Rules, 2014. Another key change is the removal of the earlier requirement of distributable profits for three years for a company to be eligible to issue shares with DVRs.

It is pertinent to note that SEBI’s recent decision does not touch upon what happens to the existing framework, which permitted DVRs with inferior rights. In any event, shares with inferior DVRs are rarely used by Indian companies, and according to a SEBI paper, only five listed companies out of more than 4,000 in India have issued shares with inferior voting rights up until March 2019.

Anuj Trivedi
Link Legal India Law Services

As per the new DVR framework approved by SEBI, an issuer company having issued shares with superior DVRs will be permitted to undertake an initial public offering (IPO) of only ordinary shares subject to the following key conditions:

  1. The issuer company qualifies as a technology company as set out above;
  2. The holder of DVRs (DVR Shareholder) should be a part of the promoter group whose collective net worth does not exceed Rs 500 Crores;
  3. The DVR Shareholder should only be a promoter/founder who holds an executive position in the company;
  4. The issue of DVRs has been authorized by way of a special resolution passed at a general meeting of the shareholders;
  5. DVRs must have been held for a period of at least six months prior to the filing of the red herring prospectus;
  6. Listing and lock-in: DVRs shall also be listed after the issuer company makes a public issue and shall be under lock-in after the IPO until their conversion to ordinary shares. Transfer of DVRs shares amongst promoters is not permitted and neither any pledge or lien can be created on DVR shares;
  7. DVRs shares shall be treated at par with ordinary equity shares in every respect including dividends and except in respect of voting on resolutions, as long as the aggregate voting right of DVR holders does not exceed 74%;
  8. Certain enhanced corporate governance norms to apply;
  9. Under certain circumstances, DVRs shall be treated as ordinary equity shares in term of voting rights − the key circumstances being (i) appointment or removal of independent directors and/or auditors, (ii) related party transactions, (iii) voluntary winding-up, etc.; and
  10. Sunset clause: the DVRs shall be converted into ordinary equity shares under the following circumstance:
    (i) time based − on the fifth anniversary of listing, and this time can be extended once by resolution for another five years; and (ii) event based − on occurrence of certain events such as demise, resignation of DVR Shareholders and merger or acquisition, where the control would be no longer with DVR Shareholders.

What are the benefits?

For Indian technology startups with few tangible assets, financing by equity shares is much preferred over debt. However, it is a double-edged sword as equity dilution weakens the control of founders in terms of management and control. The re-introduction of shares with DVRs is overall a welcome move to enable technology start-ups to attract equity capital without losing control over their companies.

The reintroduction of DVR will incentivize domestic listings by an increasing number of unicorns from India that are currently exploring listings in foreign jurisdictions. For venture capital investors, a clear path to listing makes an exit more feasible and thus investments more compelling. This will further increase supply of capital to Indian startups.

DVRs will also safeguard against hostile takeovers. Recent memories of Larsen & Toubro’s hostile takeover of software company Mindtree might have been fresh in the minds of the regulators.

Many jurisdictions worldwide have now adopted DVRs so this is yet another instance of India advancing its stated ambition of becoming a magnet for foreign investors.

Government campaigns like “Invest India”, “Digital India” and “Startup India” appear to be working well as Indian technology companies attracted as much as US$6 billion from Chinese investors alone in 2018.

Alibaba, Tencent, Xiaomi, Fosun, Bytedance, Morning Side, Qiming, CDH and many other Chinese investors have now joined their counterparts from America, Europe and Japan in evaluating and nurturing Indian technology companies. As a result of this, many learnings from China in areas such as e-commerce, fintech and edutech are being transplanted into India and benefiting billions of newly internet literate consumers.

Santosh Pai is a partner at Link Legal India Law Services. He can be contacted on +91 9004265235 or by email at
Anuj Trivedi is a partner at Link Legal India Law Services. He can be contacted on +91 9971992092 or by email at

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