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Last Updated : Jul 19, 2019 11:28 AM IST | Source: Mint

Tweaks in Companies Act to make fundraising easier

The move will be of interest to startups keen to raise capital without diluting their stake

Representative image
Representative image

Fundraising through various financial instruments may get easier for companies in the days to come with the Union Government trying to reduce compliance rigours as part of its 100-day agenda, a person familiar with the development said.

The Ministry of Corporate Affairs is working on a proposal that covers various financial instruments that come under the Companies Act, the person mentioned above said on condition of anonymity.

One such instrument is the shares with differential voting rights (DVR), which companies can use to raise capital without ceding control. "This will be of particular interest to startups keen to raise capital without diluting their stake in their company," said the person mentioned above.


DVR also allows investors to take a substantial stake in the company and be a financial investor without voting rights crossing a threshold that may mandate an open offer.

The Companies Act at present allows the issue of such shares subject to the rider that the business should have had distributable profits for the previous three years and subject to the cap that capital so raised shall not exceed 26 percent of the post-issue capital.

“We need to take a look at these conditions to see if they need to be eased. This facility will be particularly beneficial to high growth and digital economy companies," said the person mentioned above.

The idea is to review all provisions having a bearing on the cost of raising capital and re-calibrate them. Taking steps to strengthen the bond market will also be part of this exercise, said the person.

The capital market regulator issued a discussion paper on the subject earlier this year considering the need to give more liberty to businesses to raise capital without dilution of promoter holding.

Allowing businesses to access capital easily and at a lower cost is a key demand from the industry at a time the government is under pressure to revive a slowing economy. It is seeking ways of boosting private investments at a time the financial system’s woes are compounded by a liquidity crunch among non-bank financial companies, which are a source of funding for job-creating sectors such as real estate.

A six-member ministerial panel led by Prime Minister Narendra Modi is exploring ways of stimulating growth and investment.

Businesses face two challenges in making fresh investments. One is the high-interest costs that they incur despite the Reserve Bank of India slashing its benchmark interest rate three times by 25 basis points so far this year.

The other is the high-interest rates on small savings schemes that keep funds away from banks. The conservative approach that banks adopt in financing new projects while they are busy trying to recover dues from large customers using the new bankruptcy framework also makes financing new projects difficult for businesses.

Bank credit growth has fallen from its recent peak of 15.3 percent in November 2018 to a four-month low of 13.0 percent in April 2019, according to official data. The escalating trade war with the US and the possibility of slowing global economic growth rate are the other factors impacting business confidence and investments.

The World Bank had forecast in June that global growth will fall to 2.6 percent in 2019, lower than the 2.9 percent it forecast in January, before clawing back to 2.7 percent in 2020.

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First Published on Jul 19, 2019 11:28 am
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