Introduction
The tension between founder control and public shareholder rights has become one of the defining governance debates of the technology era. When Google went public in 2004 with a structure that gave its founders ten votes per share compared to one vote for public shareholders, it was viewed as an anomaly born of Silicon Valley exceptionalism. Two decades later, dual-class share structures have become standard architecture for technology company IPOs across the United States, and have been adopted with varying conditions by major exchanges in Hong Kong, Singapore, and several European markets. The underlying logic is straightforward: technology companies are frequently built around visionary founders whose decisions may diverge from conventional market consensus, and the market price that public investors pay incorporates a premium for the founder’s continued strategic leadership. Diluting that control at the time of IPO may, on this view, destroy value rather than protect it.
India’s regulatory framework for differential voting rights (DVR) shares has evolved significantly since the Securities and Exchange Board of India first addressed the issue. The 2019 framework permitting DVR shares for certain categories of listed companies represented a substantial departure from the earlier, more restrictive approach. Yet, in the years since that framework was introduced, no major Indian technology company has used DVR structures at IPO. The landmark listings of Zomato in 2021, Nykaa in 2021, and Paytm in 2021 each presented an opportunity for founder-control share structures, and each company chose not to use them. Understanding why this gap exists between regulatory permission and market practice is essential to evaluating whether the current framework requires reform, and whether the reform should expand or restrict the availability of DVR structures.
Legal Framework
The legal foundation for DVR shares in Indian company law lies in Section 43 of the Companies Act, 2013, which provides that the share capital of a company may consist of equity shares with voting rights and equity shares with differential rights as to dividend, voting, or otherwise. The section subjects differential rights shares to conditions as may be prescribed. Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014 sets out the conditions, including a requirement that the company must have had distributable profits in each of the three years preceding the issue, that the voting rights attached to shares with differential rights must not exceed 74% of the total voting rights (including those attached to equity shares with full voting rights), and that the shares with differential rights must not exceed 26% of the total post-issue paid-up equity share capital.
At the level of securities regulation, SEBI’s framework for DVR shares in the context of listed companies was substantially revised through the SEBI (Listing Obligations and Disclosure Requirements) Regulations and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. The key 2019 circulars issued by SEBI introduced a special category of “Superior Voting Rights” shares (SR shares) that could carry voting rights not exceeding ten votes per share, available only to founders or promoters of technology companies. To be eligible, the issuer had to be an innovative company, defined by reference to spending on research and development, ownership of intellectual property, or technology-driven operations. SR shares could be issued only to founders or promoters who were individuals. Companies with SR shares were required to list on the Main Board rather than SME platforms.
Importantly, the SEBI framework mandated sunset provisions for SR shares. The superior voting rights would automatically convert to ordinary equity shares upon the earliest of five years from the date of listing (extendable for another five years by a special resolution of the ordinary shareholders, excluding the SR shareholder), if the SR shareholder died, resigned as managing director or CEO, or was disqualified, or if the SR shares were transferred to any person other than immediate family members. The sunset clause reflects SEBI’s acknowledgment that founder control is justifiable during the period of active founder leadership but cannot be permitted to continue indefinitely, particularly after the founder’s personal involvement in the company diminishes.
Judicial Developments
India has no significant judicial pronouncements specifically addressing the validity or governance consequences of DVR share structures in listed companies, reflecting the fact that no major Indian company has actually implemented the SEBI framework as of the date of this writing. The Companies Act provisions permitting differential rights shares have been tested in older cases, primarily involving small companies that issued limited-voting shares to founders to protect management control, but these cases predate the comprehensive 2019 SEBI framework and do not engage with the specific governance issues that arise in public market contexts.
The closest relevant judicial authority comes from company law cases addressing the rights of preference shareholders and the limits of permissible variation of shareholder rights. The Supreme Court, in cases such as Hindustan Lever Employees’ Union v. Hindustan Lever Ltd., has affirmed the principle that share capital can be structured in different classes with different rights, subject to the statutory conditions, and that courts should not rewrite the contractual bargain reflected in the terms of issue. These principles provide some support for the proposition that SR shares, if validly issued within the statutory framework, should be treated as creating binding contractual rights that courts will uphold.
The Bombay High Court’s decisions on related party transactions in companies with concentrated controlling shareholdings are indirectly relevant. In several cases, the court has scrutinised transactions between a controlled company and its controlling shareholder under the lens of fairness, particularly where independent directors have failed to provide genuine oversight. These cases suggest that Indian courts are aware of, and willing to address, the governance failures that can arise from concentrated control, even if they have not yet had occasion to apply this reasoning specifically to DVR structures.
Contemporary Issues and Analysis
The non-adoption of DVR structures by major Indian tech companies despite regulatory permission is a puzzle that reveals the gap between formal legal possibility and practical market dynamics. Several factors explain this gap.
First, institutional investor opposition is fierce and well-organised. Large domestic institutional investors, including the Life Insurance Corporation of India, domestic mutual funds, and foreign portfolio investors, are guided by the voting policies of advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis. Both ISS and Glass Lewis maintain negative policies on dual-class share structures, recommending opposition to the election of directors at companies that have adopted such structures, and assigning lower governance scores to dual-class companies. Indian mutual funds are increasingly bound by SEBI’s stewardship code obligations to take defined positions on corporate governance matters at companies in which they invest. A company that goes public with SR shares faces a meaningful risk of ISS and Glass Lewis downgrade recommendations that could reduce demand in the institutional portion of its IPO allocation.
Second, the founder’s practical control calculation in India’s concentrated ownership environment is different from that in the United States. American founders go public having typically experienced multiple rounds of venture dilution and holding modest ownership stakes of 5 to 20% at IPO. Dual-class structures allow them to maintain control despite holding a minority of the economic interest. Indian promoters, partly due to different funding dynamics and partly due to regulatory requirements on minimum promoter contributions, frequently hold much larger stakes at the time of IPO. Zomato’s founders held meaningful stakes through direct and indirect holdings even after the IPO, and the combination of economic interest and ordinary voting rights provided sufficient practical control without needing SR shares. Nykaa’s promoter stake provided comparable insulation from hostile shareholder action. When economic ownership is sufficient for control, the marginal governance protection offered by SR shares may not justify the reputational cost with institutional investors.
Third, the five-year sunset clause, while reasonable as a policy matter, significantly limits the durability of founder control through the SR mechanism. A tech founder who goes public at age forty-five may expect to lead the company for fifteen to twenty years. The SEBI framework offers at most ten years of SR protection before a shareholder vote is required, and that vote is itself uncertain. Founders who compare this to the potentially perpetual dual-class structures available in the United States, where some companies have maintained dual-class structures for decades, may find the Indian mechanism insufficiently protective.
Fourth, the definition of “innovative company” in the SEBI framework, while broadly drafted, has not been formally tested. Companies uncertain about their eligibility, or about the regulatory risk of being found ineligible, may prefer to avoid the additional legal exposure of a structure that could be challenged. Private placement of a DVR structure before IPO is also complicated by the distributable profits requirement in the Companies Act rules, which is a significant constraint for pre-profit startups.
The governance critique of dual-class structures deserves serious engagement rather than dismissal as protectionist institutional investor advocacy. The evidence on long-term performance of dual-class companies is genuinely mixed. Studies of US dual-class companies show that while founder-controlled companies can outperform during the founder’s active leadership period, they frequently underperform once the founder steps back or passes control to family members. The canonical cases of dual-class governance failure, including the Murdoch family’s management of News Corporation and the Ford family’s influence on Ford Motor Company, demonstrate that superior voting rights retained by founders can be used to extract private benefits of control at the expense of ordinary shareholders. In India, where independent director effectiveness is already contested and institutional investor activism is underdeveloped compared to the United States and United Kingdom, the governance risks of dual-class structures may be magnified rather than mitigated.
Comparative and International Perspective
The United States dual-class ecosystem developed largely outside legislative mandate, through private contracting between founders and investors at the IPO stage. Delaware corporate law, which governs most major US companies, permits shares of different classes with different voting rights without any statutory constraints on the ratio of differential voting. The New York Stock Exchange and NASDAQ both permit dual-class listings, and the trend accelerated sharply after Google’s 2004 IPO demonstrated that dual-class companies could attract broad public investment. Alphabet (Google’s parent), Meta (formerly Facebook), Snap, Lyft, and many other prominent technology companies maintain dual-class structures. The sunset provisions, if any, are a matter of private contract rather than regulatory mandate, and many US dual-class companies have no automatic conversion mechanism.
Hong Kong’s Stock Exchange introduced its weighted voting rights (WVR) framework in 2018 specifically to attract technology company listings, having recognised that the inability to accommodate Alibaba’s preferred share structure led that company to list in New York rather than Hong Kong. The Hong Kong framework, incorporated into the Listing Rules, permits WVR shares for companies where innovative is a defined concept, with WVR holders limited to ten votes per share. Sunset provisions apply on transfer and on certain events of the WVR holder’s departure. Xiaomi and Meituan listed in Hong Kong under this framework in 2018, demonstrating that the framework was operationally viable. The Hong Kong Securities and Futures Commission has maintained ongoing scrutiny of WVR companies’ governance, and the experience has been generally positive in terms of maintaining market integrity.
Singapore’s Singapore Exchange (SGX) introduced dual-class shares for mainboard listings in 2018 following an extensive consultation process. The SGX framework, like Hong Kong’s, imposes a ten-to-one maximum voting ratio and includes sunset provisions. The first major dual-class listing on SGX was Grab Holdings in 2021, which listed through a US SPAC merger but maintained a dual-class structure consistent with SGX requirements. Singapore’s approach reflects the city-state’s deliberate strategy of attracting high-growth tech company listings by matching the governance flexibility available in US markets while maintaining enhanced disclosure requirements.
The European experience is more varied. Sweden and the Netherlands have long traditions of dual-class and priority share structures in large companies including Volkswagen and LVMH, though these predate the tech company governance debate. The UK prohibited dual-class structures for premium listings until July 2021, when the Financial Conduct Authority introduced a framework permitting them for founder-controlled companies on the premium segment subject to a five-year sunset and enhanced shareholder rights in certain circumstances. The UK reform was directly motivated by the desire to attract technology company listings post-Brexit.
Practical and Policy Implications
India’s experience with the DVR framework suggests that regulatory permission alone is insufficient to drive adoption of governance innovations. The regulatory framework must be calibrated to the actual dynamics of the market it seeks to influence. The absence of DVR adoption in major Indian tech IPOs reflects not a failure of the framework’s design in any narrow legal sense, but rather a misalignment between the incentive structure created by the framework and the preferences and constraints of the relevant market participants.
For SEBI, the practical challenge is to make DVR structures genuinely attractive to founders who would otherwise not use them, while maintaining adequate protection for public shareholders who may not fully appreciate the governance risks of concentrated control. This is inherently a balancing exercise, and the current framework has tilted somewhat too far toward caution in ways that reduce adoption without necessarily improving investor protection.
For companies considering DVR structures, the reputational cost with institutional investors is the dominant consideration, and regulatory reform alone cannot address it. What may change this dynamic is continued successful performance by dual-class companies in other markets, combined with the development of Indian institutional investor stewardship capacity that allows nuanced evaluation of dual-class structures rather than categorical opposition.
Suggestions and Reforms
SEBI should review the practical impact of the five-year sunset clause and consider extending the initial protected period to ten years, with a possible further extension upon ordinary shareholder approval. A fifteen to twenty year maximum, implemented through staged conversion requirements, would better align the protection period with the realistic duration of founder active leadership in technology companies.
The definition of eligible issuers under the DVR framework should be clarified and expanded to reduce uncertainty about eligibility. A clear, administrable test based on the proportion of revenue derived from technology products and services would provide more certainty than the current qualitative criteria.
The distributable profits requirement in Rule 4 of the Companies (Share Capital and Debentures) Rules should be modified for pre-IPO issuance of DVR shares, recognising that technology companies with strong growth prospects and venture backing may be pre-profit at the time of structure creation while being fully viable candidates for SR share arrangements at IPO.
SEBI should convene a formal dialogue with domestic institutional investors and mutual fund bodies to develop nuanced stewardship guidelines on dual-class structures, rather than allowing a blanket negative policy to persist by default. Such guidelines could specify the circumstances under which institutional investors will support or oppose dual-class structures, creating a more predictable governance landscape for founders and underwriters.
Enhanced disclosure requirements for SR share companies, including mandatory independent board committee review of all related party transactions and annual board self-assessments published in the annual report, would address some of the legitimate governance concerns about concentrated control without foreclosing the DVR option.
Conclusion
India has built the legal architecture for dual-class share structures; the challenge now is to ensure that the architecture is actually used where it can create value. The non-adoption of DVR structures by major Indian tech companies at IPO is a missed opportunity, though not an irreversible one. As Indian technology companies continue to mature and as the domestic capital market deepens, the founder control question will return with increasing urgency. The regulatory and institutional frameworks that govern this question should be ready to accommodate innovation in share structure design while maintaining the governance standards that protect the millions of ordinary investors who participate in India’s public markets. Getting this balance right requires ongoing regulatory learning, international comparison, and a willingness to revise frameworks that are not achieving their stated objectives.
