Sign Up on Practicemock for Free Tests, Current Affairs, Exam Notifications and Updates

The importance of reading editorials of reputed newspapers is not hidden from anybody. What causes obstruction are difficult words which act like speed-breakers forcing you to either refer to a dictionary for its meaning or simply guess it. While getting the meaning from the dictionary is the best way to understand it, sometimes a dictionary is not within your reach. Also, a number of aspirants get confused when they see more than one meaning next to a word in a dictionary. It becomes a difficult process for them to pick the relevant meaning.

We at PracticeMock understand this and that’s why we have come up with a series of Editorials’ Difficult Words where we shortlist the important editorials of the day and pick the difficult words/phrases therein. Next to the word, we put only the contextual meaning so that you don’t get confused. Let’s check out today’s editorials.

IBPS PO Prelims Free Mock

First among equals: The issue of shares with DVRs to promoters is good for tech start-ups, but not public investors

Shares with inferior voting rights can suffer from low awareness, institutional interest, poor liquidity and chronic mis-pricing

In a bid to add more muscle to Indian start-up founders in their dealings with private equity investors, the Centre relaxed the Companies (Share capital and Debentures) Rules last week, making it easier for companies to issue shares with differential voting rights (DVRs) (A DVR share is like an ordinary equity share, but it provides fewer voting rights to the shareholder.) to their promoters. Apart from allowing DVR shares amounting to 74 per cent of paid-up capital from the present 26 per cent, the new rules also waive the requirement of a three-year profit record for a company to be able to issue such shares. This follows amendments by SEBI last month to its listing and disclosure (a private financial record that a company must show to the government, investors, banks, etc. for business purposes,) regulations, which enabled companies with shares carrying superior voting rights to be listed on the bourses (stock markets), subject to certain conditions. While these measures are quite welcome for India’s start-up ecosystem, they may turn out to be a mixed blessing (something which has disadvantages as well as advantages) for retail investors in public markets.

IBPS PO Prelims Free Mock

For start-up founders, shares with superior voting rights solve two immediate problems. One, they get to retain control over business decision-making even after significantly diluting (to make something less valuable) their equity stakes. Of late (recently), there have been instances, including Flipkart’s, of start-up founders being unceremoniously (rudely) ousted from the companies they actively contributed to, by foreign investors with more financial clout (power). Anointing (to choose someone to do a particular job) promoters with special decision-making powers when their financial interests don’t justify it may not go down well with PE/VC investors, but that’s a matter to be bilaterally negotiated. Two, superior voting rights may also help pre-empt (to prevent something from happening by taking action first) situations where promoters reluctant to dilute equity take on excessive leverage (the ratio of a company’s loan capital (debt) to the value of its common stock (equity)). In fact, if the intent of this move was to boost India’s entrepreneurial ecosystem, one wonders why SEBI has extended this concession only to companies which are “intensive in their use of technology”. New ventures in any field may benefit from pursuing asset-light models that reduce debt funding.

Having said this, there is a flip side (another aspect of something) to allowing companies with unequal voting rights to list in the public markets. Indian promoters, even with minority stakes, often manage to exercise undue influence on key corporate decisions; superior voting rights may only aggravate such mis-governance. SEBI has tried to pre-empt this by restricting the issue of superior rights shares only to promoters who hold executive positions, with a group net worth of less than ₹500 crore. There’s a list of voting decisions where they won’t have extra rights and a stipulation for more independent directors on these companies’ Boards. There’s also a sunset clause, requiring companies to convert superior rights shares into ordinary ones within five years of their public offer. But irrespective of these safeguards, the experience with DVR shares suggests that shares with inferior voting rights can suffer from low awareness, institutional interest, poor liquidity and chronic mis-pricing. It is the retail investors who may need to tread with caution. The possibility of promoters wielding disproportionate clout for the first five years is an extra risk factor to check for while subscribing to IPOs.

IBPS PO Prelims Free Mock

We hope this article has helped you understand some new words and their usage. Read other such articles here. Let us know in the comments section below if you have any feedback to share.

Download Practicemock App for Updated Current Affairs, Free Topic-Wise Quizzes and Free Mini Mocks
PracticeMock recommends AffairsCloud Current Affairs 2020 PDF. Buy Now and get Rs. 30 off by using the coupon code "PRACTICEMOCK"

    Free Mock Tests & Relevant Articles for the Upcoming Exams

Other Exams
Free Mock TestRelevant Articles
SEBI Grade A Phase I Free Mock TestSEBI Grade A
SBI Clerk Mains Free Mock TestSBI Clerk
RBI Assistant Mains Free Mock TestRBI Assistant
LIC AAO (Specialist) Prelims Free Mock TestLIC AAO (Specialist)
SBI PO Prelims Free Mock TestSBI PO 
RBI Grade B Phase I Free Mock TestRBI Grade B

Write A Comment