Change in voting rights

INVESTING

Investors should start gearing up for a new category of shares "� shares with differential voting rights. Tata Motors introduced it in May this year to raise Rs 2,000 crore to fund its Jaguar and Land Rover deal. After the Tatas, it is expected that many companies would be encouraged to introduce such offerings in the future.

The features of these shares will be different from normal equity holding, where the shareholder is perceived to have a stake in the company. And this ownership gives the investor the right to vote in the affairs of the company.

This is done usually at the general meetings of the company (both annual general meeting and extraordinary general meeting) or through the postal ballots. This new category position can be utilised very well by companies that are already listed and who want to raise more capital without too much of a dilution in the voting power.

Across the world shares with differential voting rights are common. These are used effectively by management to maintain control over the company. The shares with the different voting rights are classified into separate classes so that they are easily distinguished by investors.

Those controlling the company can hold a small amount of shares, but have a higher voting power that gives them effective control. Orient Express is a good example where the controlling shareholders hold such shares. The voting power is used to ward-off takeover threats.

Under differential voting rights, shares that are issued by a company could have higher or lower voting rights. For instance, a company can have shares where the voting right is 1 for every 5 shares. In such a case, an investor holding 100 shares will have only 20 votes in the overall structure of the company.

Also, if these shares are reducing voting rights, they are likely to be available for a differential price as well. And whereas, the existing price of the company's shares is known by their trading prices at the respective stock exchanges, these shares could be issued to the investors at a lower price.

The most important thing for the shareholder will be to distinguish the features. Another important point for investors is that they should not believe that they stand to gain by the difference in the price offered here and the price at stock exchanges.

Importantly, shareholders will need to know how they will be traded. There will have to be ways defined to denote the shares like Class A and Class B shares and so on to help the investor to distinguish the position for their holdings. At the same time, this will help in a proper price discovery.

Such shares would be typically targeted towards investors who are more interested in earning dividends as well as capital gains from their investment. In most cases, small investors hardly exercise their voting rights and many of them do not even know what they are supposed to do, in terms of voting and influencing action in the company.

In such a situation the shares might be attractive for a lot of investors who are able to make money on them, but the actual situation will be known only once issues like these hit the market.

The writer is a certified financial planner