The Ultimate Revelation of DVR SHARES : By Anwesa Nayak

INTRODUCTION

There is an increasing desire for a strong capital base, with organisations needing more funding from stock and less managerial meddling. Until the year 2000, when DVR shares were introduced for the first time in India, the financial world's bedrock concept had been 'one share, one vote.'

But what exactly is a DVR Share?

DVR stands for Differential Voting Rights. When a corporation needs to raise funds, but the promoters don't want to dilute their authority, they issue these shares. DVR shares are issued by the same corporation that issues ordinary shares, but instead of receiving one vote per share, DVR shareholders receive different (greater or lower) voting rights than regular shareholders. That’s how DVR got its name.

DVRs are of two types:

1. Shares with superior/higher voting rights- A single share can receive several votes. For E.g.: In a 10:1 ratio, higher voting rights would imply 10 votes per share held

2. Shares with lower/inferior voting rights- A portion of one equity share's voting rights. For E.g.: In a 1:10 voting rights ratio, one vote would be cast for every ten shares held

MERITS AND DEMERITS OF DVR SHARES

DVR shares have their own set of benefits and drawbacks, which should be understood by both issuers and investors.

ORDINARY SHARES VERSUS DVR's IN INDIA

In India, DVR shares have been issued by Tata Motors, Pantaloons Retail India (Future Retail group), Gujarat NRE Coke, and Jain Irrigation. These have a trading volume of 75-90 percent less than ordinary shares.

Tata Motors DVR and Jain Irrigation DVR have managed to maintain a significant discount on the price of the ordinary share during the last five years. Consider the following table and the graph:

WHY ARE DVR SHARES NOT TAKEN SERIOUSLY IN INDIA

Despite the benefits, DVR shares as a concept have yet to gain traction in India. Just four companies have developed DVRs, demonstrating that the product has failed to appeal to both shareholders and promoters. What are the reasons for DVRs' lack of popularity as a tool?

• The dividend discrepancy must be significant to persuade shareholders to give up their voting rights. In the instance of Tata Motors, DVR holders will receive a rupee dividend of Rs.21 if regular shareholders receive a rupee dividend of Rs.20. Shareholders don't seem to think that's a good enough deal to give away 90 percent of their voting power.

• Another concern is DVR liquidity since institutions have been hesitant to engage. Following its inclusion in the Nifty, the Tata Motors DVR saw an increase in volumes, while other DVRs have lacked trading activity. This makes it difficult to attract institutional investors to DVRs, as control and voting power are important factors for institutional investors.

• According to SEBI, DVR shareholders are not entitled to a higher dividend than ordinary shareholders. The dividend differential between the three corporations that issued DVRs isn't particularly appealing. Tata Motors DVR, for example, only pays a 5% premium, while Future Enterprises DVR only pays a 4 paisa premium. Jain Irrigation pays the same dividends to its ordinary shareholders and to its DVR shareholders, which results in failure to tempt investors.

• Institutional investors are unwilling to invest in equity that does not include voting rights. Institutions would prefer a vote, especially when it comes to corporate governance issues such as the ones that Infosys and the Tatas have encountered in the past. This benefit is not available with DVR.

CONCLUSION

In the last ten years, India has experienced a surge in new-age businesses, particularly in the technology sector. One of the most difficult challenges for founders is raising financing for expansion without losing control. SEBI's attempt to address this concern by establishing a regulated DVR framework to improve access to the Indian capital markets is timely. However, India lacks the instruments to control even more power to the promoter class due to insufficient investor rights and a complete lack of class action laws. Adopting Western norms and focusing on the benefits without considering India's inadequate investor protection status could lead to a race to the bottom.

Considering all factors, one can determine whether or not shares with differential voting rights are appropriate for them. Above all, people should keep their financial goals and risk-taking abilities in mind at all times.

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