differential voting rights (DVR shares) are like ordinary equity shares but with
differential voting rights. They are listed and traded in the same manner as
ordinary equity shares. However, they mostly trade at a discount as they provide
fewer voting rights compared to ordinary equity shares. Companies generally
compensate DVR investors with a higher dividend.
In India since
2001, issue of DVR shares has been allowed. These can be used to thwart hostile
takeovers, as for all practical purposes, they decouple economic interest and
voting rights. Shares with DVR are mainly targeted at passive investors. In most
cases, small or retail investors hardly exercise their voting rights, nor do
they have an understanding of corporate affairs to an extent that they can
influence corporate actions. They invest in shares only for economic returns.
Therefore, they give away their voting rights in favour of those investors who
run the company and have management control. Thus, this mode offers investors an
avenue to acquire shares at lower prices with prospects of higher dividends in
return for surrendering their voting rights.
DVR shares offer
investors an opportunity to earn better returns in lieu of surrendering their
voting rights and also allow a company to dilute its equity without matching
dilution in the promoters’ stake. At times companies issue DVR shares to fund
new large projects. This also helps strategic investors who do not want control
but are looking at a reasonably big investment in a company.
Section 86 of the
Companies Act permits the issue of equity shares with DVRs, subject to
conditions prescribed under the Companies (Issue of Share Capital with
Differential Voting Rights) Rules, 2002.
Rule 3 provides
that every company limited by shares may issue shares with differential rights
as to dividend, voting or otherwise, if apart from specified procedural
compliances, it conforms to the following:
It has not defaulted in filing annual accounts
and annual returns for three financial years immediately preceding the
financial year in which it was decided to issue such shares.
The issue of such shares cannot exceed 25% of the
total issued share capital of the company.
A large number of
global giants have raised funds through DVR issues, prominent among them are
Google, NewsCorp and Berkshire Hathaway.
While DVR is a
well-accepted instrument used by blue-chip companies in international markets to
raise funds, even after a decade of the government’s Notification, the concept
is yet to gain wide currency in India.
Retail India Ltd. Bonus Issue:
In July 2008,
PRIL, India’s leading retailer, was the first to issue bonus shares with a DVR
option. The company made a bonus issue of 1: 10 shares with differential voting
rights and 5% additional dividends as well. Although there is no fund-raising
involved in a bonus issue of shares, the idea was to get the markets familiar
with such instruments and create another alternative to raise funds in the
future. “Differential voting rights (DVR) has become a widely used innovative
instrument in global markets and by coupling a bonus issue with a DVR, we
believe in enhancing alternatives for our shareholders,” Kishore Biyani, MD of
PRIL had stated in a press release.
Gujarat NRE Coke
2009, the company issued B Equity Shares of the Company with Differential Voting
Rights (DVR Shares) with lower voting rights (1/100th of the voting right of
ordinary equity share). The same were issued as bonus shares in the ratio of 1 B
equity shares for every 10 equity shares held. The above illustrates the past
one year relative performance of the ordinary equity share (512579) is-à-vis
the DVR share (GUJNREDVR) and the broader markets (BSE Sensex). We find that
while both the ordinary as well as the DVR share have moved in a direction
opposite to the BSE and have witnessed reduced share prices; the magnitude of
the fall for DVR (29%) is less than that of the ordinary share(39%).
Tata Motors DVR:
In October 2008,
Tata Motors became the first Indian company to make a rights issue of shares
carrying differential voting rights (DVR) (issue size: Rs.1960.42 crores). DVR
shares have 1/10th of voting rights of ordinary shares and offer a 5% higher
rate of dividend over the normal shares. It issued theseshares at Rs.305 i.e.,
about 10% lower than the issue of normal rights at Rs.340.
illustrates the past one year relative performance of the ordinary equity share
(500570) vis-à-vis the DVR share (TATAMTRDVR) and the broader markets (BSE
Sensex). We find that while both the ordinary as well as the DVR share have
outperformed the BSE; the magnitude of the gain for DVR (39%) is less than that
of the ordinary share (48%).
For an investor,
who believes in being a part of the company’s decision processes, DVR shares are
not attractive due to limited voting rights.
However, if one
is a minority investor and isn’t concerned much with voting rights per se, then
investing in the DVR would certainly be an attractive proposition. DVRs mostly
trade at a discount, largely due to the fewer voting rights they enjoy. However,
at times, the gap between DVR and ordinary shares is large, providing good
opportunity to investors. (Globally, the discount between shares with DVRs and
ordinary shares is about 10%.) Not only does an investor stand to gain from
capital appreciation in a scenario where the price difference between the
ordinary and the DVR share reduces over a period as a result of rising awareness
about the product, he will also be entitled to higher dividends. Furthermore, he
can always invest back in ordinary shares by exiting DVRs once the differential
narrows. Thus, the riskreward ratio of investing in DVRs looks somewhat skewed
towards the latter. The only caveat is that before investing in a DVR, investors
need comfort about the company’s fundamentals and prospects, and more
importantly, its management.