BSE allows shares with lower voting rights in benchmark indices

S&P BSE Indices, the index provider for BSE, has announced the inclusion of differential voting rights shares (DVRs) into the main benchmark indices. These DVRs will be included in indices like the S&P BSE Sensex, S&P BSE 100, S&P BSE 200 and S&P BSE 500.

The inclusions will be effective from the next rebalancing of the indices, in June 2015, said a release from BSE on Wedesnday.

DVRs are shares which mimic the ordinary share of a company but trade at a discount. They have lower voting rights and earn higher returns for their investors who forego their voting rights.

"This change will increase the number of stocks in a fixed count index; however the number of companies will remain fixed as detailed in the index methodology," said the release. At present, there are four DVRs in the market. Tata Motors DVR is the most liquid and popular among investors. Jain Irrigation, Gujarat NRE Coke and Pantaloon Retail DVRs do not see much interest because of the weak demand for the ordinary shares of these companies.

Experts said that the inclusion of DVRs into the main indices would lead to a reduction in the price-differential between the ordinary share and the DVR. Globally, DVRs trade at a 30-35 per cent discount to the ordinary share while in India, they trade at a 50-60 per cent discount.

"Having both the DVR and the ordinary share in the same index would help reduce this gap benefitting investors," said Pankaj Pandey, head of research, ICICI Direct.

Market participants said that the introduction of DVRs into the indices could see a gradual increase in demand for DVRs in the market, prompt many good companies to introduce their own DVRs.

"For a company which wants to gain more voting rights, they would want to come out with DVRs as it helps these companies to raise funds without diluting their stake," said Alex Mathew, head of research, Geojit BNP Paribas Financial Services.

The BSE release said that DVRs would be included in an index if the ordinary shares of that company are already a part of the index. The DVR shares outstanding must also be at least 10 per cent of the total shares outstanding - inclusive of ordinary shares and DVRs.

The exchange also said that DVRs could be examined for inclusion individually if these meet the criteria for inclusion. DVRs can also be considered for inclusion in between rebalances. However, once a company is excluded from the index in between rebalances then its DVR will also be removed, the BSE statement said.