BSE allows for shares with lower voting rights in benchmark indices

Changes to be effective from June 2015, at the next rebalance of the indices

S&P BSE Indices, the index provider for the BSE, has announced the inclusion of differential voting rights shares (DVRs) into the main indices, including the Sensex, the S&P BSE 100, S&P BSE 200 and S&P BSE 500. The inclusions would be effective from the next rebalancing of the indices, in June, said a release by the exchange on Wednesday.

DVRs, securities with lower voting rights, earn higher dividend than ordinary shares.

Currently, there are four DVRs in the market. While the Tata Motors DVR is the most liquid and popular among investors, the Jain Irrigation, Gujarat NRE Coke and Pantaloon Retail DVRs haven’t seen much interest because of weak demand for the ordinary shares of these companies.

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

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

Market participants said the inclusion of DVRs into indices could lead to a gradual increase in demand for DVRs and prompt many companies to introduce DVRs.

Analysts said that companies which are not interested in giving away more voting rights would want to issue DVRs.

 

"For a company where the promoters have a majority voting rights, issuing DVRs does not make sense. But 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 fund without diluting their stake," said Alex Mathew, head of research, Geojit BNP Paribas Financial Services.

As per a news release from the exchange on Wednesday, S&P BSE Indices has laid down rules for the inclusion of the DVRs into the main exchanges. At the time of the rebalance, DVRs of companies whose ordinary shares are part of the index will be allowed. The DVR shares outstanding must be at least 10 per cent of the total shares outstanding - inclusive of ordinary shares and DVR share class - of the company.

The exchange also said that DVRs could be examined for inclusion individually if it meets the criteria for inclusion into the index. DVRs can also be considered for inclusion in between rebalances provided the ordinary shares of that company are also included in the index.

However, if in between rebalances, a company is excluded from the index then its DVR will also be removed, the BSE statement said.