Snapdeal effect? Ola restricts SoftBank rights, strengthens those of founders

Bhavish Aggarwal, CEO and co-founder of Ola, an app-based cab service provider, poses in front of an Ola cab in Mumbai March 3, 2015. REUTERS/Shailesh Andrade/File Photo

Cab-hailing firm Ola has made sweeping changes in its shareholder terms, strengthening the rights of its founders and restricting those of its largest investor SoftBank Group Corp. and others.

It’s the first instance of start-up leaders shielding themselves against potentially hostile action by powerful shareholders after some of the country’s top entrepreneurs lost control of their companies this year.

The move by Ola co-founder and chief executive Bhavish Aggarwal to put restrictions on SoftBank’s rights comes as the Japanese investor is close to winning a boardroom battle at another portfolio company, Snapdeal (Jasper Infotech Pvt. Ltd).

SoftBank is in the process of selling Snapdeal to Flipkart amid a bitter boardroom battle in which Snapdeal co-founders Kunal Bahl and Rohit Bansal initially wanted to keep the company independent despite the fact that it had lost out in the e-commerce battle to Flipkart and Amazon India. Ola counts Bahl and Bansal as two of its early investors.

In January, another powerful Ola investor, Tiger Global Management, had installed its seniormost India employee, Kalyan Krishnamurthy, as CEO of Flipkart, replacing co-founder Binny Bansal.

Ola will issue additional shares to co-founders Aggarwal and Ankit Bhati to keep their composite shareholding in the company at between 10.9% and 12.38%, according to the latest articles of association (AoA) filed by Ola’s holding company ANI Technologies Pvt Ltd. Their exact shareholding will depend on the amount Ola finally raises in its ongoing funding round. In any case, their shareholding will not drop below 10.9% from roughly 12% before the latest capital infusion.

According to the AoA, reviewed by Mint, Ola’s founders have secured rights to restrict the ability of its investors to increase their stake. Any transfer of equity shares by Ola investors representing 10% or more of the company’s capital will need to be approved by Aggarwal and Bhati, who is also Ola’s chief technology officer.

SoftBank, in particular, cannot buy more equity shares in Ola without approval from the company’s founders and board of directors, according to the amended AoA which define the terms of governance and management. The exceptions to this clause include one on SoftBank’s right to buy more shares to maintain its stake (but not to increase it). The AoA was filed with the Registrar of Companies on Tuesday.

Ola has also added terms that put conditions on SoftBank’s ability to influence boardroom matters. The amended AoA gives SoftBank, which currently has one representative on Ola’s board, the right to appoint one more director “provided that such person is reasonably acceptable to the founders, and all other shareholders”. However, SoftBank’s right to appoint a second board member will not apply if the Japanese company ends up owning 50% or more of the preference shares in Ola’s ongoing funding round, according to the AoA.

The several restrictions referred to above may also protect some smaller Ola investors, simply by capping SoftBank’s ability to influence the course of Ola. SoftBank owns nearly 40% of Ola, which also counts Matrix Partners, Tiger Global, Sequoia Capital, Steadview Capital, Accel Partners and others as investors.

It’s not clear if the developments at Flipkart and Snapdeal directly prompted Ola to make the changes. But a person close to Ola’s board said the co-founders and some smaller investors made the changes to specifically put restrictions on SoftBank.

“After the Snapdeal issue, obviously entrepreneurs and VCs (venture capitalists) have become wary of SoftBank. From the point of view of (the boardroom battle at Snapdeal), Bhavish has always been ahead of the curve. He hasn’t let any one investor, be it Tiger or SoftBank, become too powerful,” said the person.

Ola didn’t respond to an email seeking comment. SoftBank declined to comment.

Ola’s founders have strengthened their rights relative to SoftBank despite the fact that SoftBank has recently increased its stake in the company after pumping an additional $250 million into Ola in November. The infusion is part of Ola’s ongoing funding round, in which it also received $100 million from Ratan Tata’s RNT Capital Advisers and Falcon Edge Capital.

It is looking for more but funds have been tough to come by as potential investors have backed off from putting cash into an Uber rival in a sector that is yet to prove it can deliver profits.

While the CEO change at Flipkart and the forced sale of Snapdeal have differing causes, the common factor in the two situations is that they involve the assertion of the largest investors at these companies at the expense of the respective founders. Alarmed by the fact that the Bansals of Flipkart and the founders of Snapdeal, who are considered the icons of entrepreneurship, lost control of their start-ups, some CEOs are privately talking of securing stronger rights. These entrepreneurs look longingly at the control enjoyed by some US start-up founders such as Facebook’s Mark Zuckerberg and Snapchat’s Evan Spiegel, whose disproportionately high voting rights ensure it’s tough for investors to wrest away control of the companies from these founders.

Yet, in India, where start-up successes have been difficult to come by, investors are likely to continue to be ascendant. Even in Ola’s case, the new rights secured by its founders only restrict rather than neutralize SoftBank’s power at Ola.

Still, the move is significant as it may prompt other entrepreneurs to secure stronger rights with investors.

“There have been instances of investors throwing the promoters out or making them irrelevant. (After the Snapdeal episode) there is some sense of insecurity among the founders and early investors. That is what is playing out right now,” said a partner at a law firm that works with start-ups. He spoke on the condition of anonymity.

Also read:

India: Vani Kola quits Snapdeal board amid sale talks with Flipkart

India: Ola Cabs losses jumped three-fold to nearly $361m in fiscal 2016

This article was first published on Livemint.com