What are Differential Voting Rights (DVR) Shares? – Indian Examples

Differential Voting Rights – Tata Motors vs Tata Motors DVR

Introduction

What are Differential Voting Rights (DVR) Shares? What is the difference between DVR shares and ordinary shares? Why Do Companies Issue DVR shares? Here is all you need to know about DVR shares.

DVR shares are issued by the companies to raise funds by bringing in passive investors, while safeguarding dilution of voting rights, with less involvement in the management of the company.

All About Differential Voting Rights (DVR) Shares

What Are Differential Voting Rights (DVR) Shares?

• The demand for a sound capital base is growing where companies need more capital through equity and less interference in the management. Thus, the concept of Differential Voting Rights (DVR) Shares has gained momentum.
• DVRs are like ordinary shares that have differential voting rights. DVR shares have rights attached to them that are disproportionate to the economic rights over the shares.
• There are 2 types of DVRs :
  1. Shares that have Superior / Higher voting rights
     • Multiple votes on one share
     • For Example : Voting right 10:1 means 10 votes are allowed for each share. However, It is not allowed in India.
  2. Shares that have Inferior / Lower voting rights
     • A fraction of the voting right on one equity share
     • For Example : Voting right 1:10 means only 1 vote is for 10 shares.

Why Do Companies Issue DVR Shares?

1. Prevention of Hostile Takeover
   • DVR shares act as one of the key investment tools which are much needed by the Companies to cope up with the competition prevailing in the market and for their survival.
   • Companies issue DVR shares for prevention of a hostile takeover.
2. Bringing in Passive Strategic or Retail Investors
   • Promoters of a company may not always be able to meet the company’s growing funding demands.
   • In such cases, companies and promoters seek investment from external sources including from passive strategic or retail investors, who are not much interested in voting rights.
   • Companies issue DVR shares to fund new large projects or business expansions, due to fewer voting rights.
   • It also helps strategic investors who do not want control, but are looking at a reasonably big investment in a company.
3. Safeguard the Dilution of Voting Rights
   • External rounds of financing not only lead to dilution of the promoters’ shareholding in the company, but also result in key business decisions being made by investors who have brought in more capital in the company.
   • The dilution of voting rights might hamper company’s decision making power, ultimately resulting in a loss of control over the affairs of the company.
   • In such a scenario, shares with DVRs help promoters in retaining their right to vote on business decisions irrespective of their capital contribution.

Which Indian Companies Have Issued DVR Shares?

• Four Indian companies, Tata Motors, Pantaloons Retail India, Gujarat NRE Coke and Jain Irrigation Systems have issued DVRs so far.
• Tata Motors vs Tata Motors DVR – Explained
  • In 2008, Tata Motors issued DVR shares for raising the funds for acquisition of Jaguar Land Rover. It was the first company in India to issue DVR shares and amongst the very few in Asia.
  • To fund the acquisition of Jaguar Land Rover, it issued 6.4 crore DVR shares at Rs.305 a share which was at 10.3% discount to the ordinary share price of Rs.340.
  • These DVRs offer 5% more dividends. DVRs carry one-tenth the voting rights of ordinary shares. This means 10 DVR shares equal one ordinary share as far as voting rights are concerned.

Benefits of DVRs

1. Higher Dividend Payout
   • DVR shares are paid a dividend premium of 10-20 % to compensate for the lower voting rights.
   • The higher dividend pay-out makes the DVR a lot more attractive in terms of dividend yields.
   • For example, Tata Motors DVR shares will offer 5% of more dividend than ordinary Tata Motors shares, which quite attractive from investors point of view.
2. Trade at Discounted Share Price
   • DVRs have always quoted at a discount of 30-40% in the Indian context DVRs mostly trade at a discount.
   • However, at times, the gap between DVR and ordinary shares is big, providing investment opportunities. 
   • Tata Motors ordinary share price was Rs.70.2 whereas Tata Motors DVR was at Rs.30 as on March 25, 2020.
3. Attractive for Passive Strategic / Retail Investors
   • Issuing DVR shares helps passive strategic investors who do not want control or voting rights.
   • These passive investors are looking at a reasonably big investment in a company.

Conclusion

• For an investor, who wants to be in the company’s decision processes, DVR shares is not an attractive proposition due to limited voting rights.
• But if an investor is not interested in voting rights, then investing in the DVR would certainly be an attractive option.