What are differential voting rights (DVR) shares?

A DVR share is like an ordinary equity share, but it provides fewer voting rights to the shareholder. So, for instance, while a normal Gujarat NRE Coke shareholder can vote as many times as the number of company shares heshe holds, someone who holds the company’s DVR shares will need to hold 100 DVR shares to cast one vote. The number of DVR shares required to be held will differ from one company to another.

Why are these issued by companies?
Companies issue DVR shares for prevention of a hostile takeover and dilution of voting rights. It also helps strategic investors who do not want control, but are looking at a reasonably big investment in a company. At times, companies issue DVR shares to fund new large projects, due to fewer voting rights, even a big issue does not trigger an open offer. The Companies Act permits a company to issue DVR shares when, among other conditions, the company has distributable profits and has not defaulted in filing annual accounts and returns for at least three financial years. However, the issue of such shares cannot exceed 25 per cent of the total issued share capital. Some companies that have issued DVR shares on our bourses include Tata Motors, Pantaloons and Gujarat NRE Coke. According to reports, Tata Steel has plans to raise $1 billion through various instruments, including DVR shares.

Who should invest in DVR shares?
It offers both retail and institutional investors a variation, especially for those who may not be as particular about voting rights, but may see economic value in the form of higher discount offer that is being made and also for the incremental dividend.

Why should retail investors invest?
These are, ideally, good instruments for long-term investors, typically small investors, who seek higher dividend and are not necessarily interested in taking a voting position. Although DVR shares are listed in the same way as ordinary equity shares, these trade at a discount, as these provide fewer voting rights to the holder. Investors can also take advantage of the price differential of DVR and normal shares. When Tata Motors had declared its dividend in 2006, it gave the DVR holders a divided of six per cent and the ordinary shareholders one per cent. For example, the Tata Motors DVR shares were trading at Rs 689.80 on the National Stock Exchange (NSE) and the ordinary ones at Rs 1,255.75 on Wednesday.

What are the disadvantages?
DVR shares are thinly traded scrips, which means these are highly illiquid stocks. On Wednesday, a total of 2,67,000 ordinary shares of Pantaloons were traded on NSE and only 1,154 DVR ones. A total of 44,214 DVR shares of Gujarat NRE Coke were traded on Wednesday and 5,90,000 of the ordinary ones.