DVRs index inclusion decison next year

BSE index provider floats consultation paper

The decision to include differential voting rights (DVR) shares — with higher dividends and lower voting rights — in the benchmark indices might come early next year.

BSE's index provider Asia Index Private said in an email response that the responses to a consultation paper floated by it last month were under review and the results would be announced separately. Asia Index Private is a 50-50 partnership between S&P Dow Jones Indices and the BSE.

"We have received responses from a number of asset managers and institutional investors," said Alka Banerjee, managing director, equity indices product management, S&P Dow Jones Indices. "Decisions are taken after the index committee has an opportunity to review all the responses. The results will come out in early 2015."

The consultation paper titled Review of Differential Voting Rights Shares in S&P BSE Benchmark Indices was released on November 3 and the deadline for the feedback on its website was December 1, 2014.

"We have received market commentary that to reflect the true size of a company and market segment, DVRs should be included in the indices," said the consultation paper.

The benchmark indices, according to the paper, have been recognised as S&P BSE Sensex, S&P BSE 100 index, S&P BSE 200 index, S&P BSE 500 index, S&P BSE Midcap index and the S&P BSE Smallcap Index.

DVRs are shares much like the common shares of a company except in that they reward investors with higher dividends in return for lower voting rights and trade at a discount to the common shares. Globally, a DVR trades at a 10-15 per cent discount to its common stock. Inclusion of the DVR in an index would lower the discount between the common stock and the DVR, analysts said.

It also allows companies to raise money from the market without diluting stake.

Currently, fours DVRs are traded on the BSE - Tata Motors, Future Retail, Gujarat NRE Coke and Jain Irrigation. The most popular among these is the Tata Motors DVR, while trading in the others remains lacklustre. Tata Motors has a free-float of Rs 16,771 crore and has a two-week trading average of 147,000 shares.

Some in the market believe the inclusion of DVRs could help provide liquidity in these stocks and provide an opportunity for investors looking for higher returns.

However, others believe the double-representation of shares is rendered meaningless in an index.

"An index is meant to reflect a company's financial performance, not its share price returns. There is no rationale behind having two instruments of the same company in one index. Why do you need that kind of duplication?" said S P Tulsian, an independent financial analyst.

The DVR market in India has long-struggled to find a foothold as trading volumes in these instruments remain very thin.

"It is unlikely that DVRs will find a place in the main index and there are hardly any index-funds or exchange-traded funds that are benchmarked to the secondary indices for there to be any real-demand for returns by investors. Overall, it will not make much of a difference," said Rikesh Parikh, vice-present (equities), Motilal Oswal Securities.

An email query sent to India Index Services & Products - the index provider for NSE - did not elicit a response.