Capital Market

Differential Voting Rights Shares (DVR Shares)

Alex K. Mathews, Research Head

Differential Voting Rights shares or DVR shares are shares which carry voting rights and/or dividend ratio different from normal shares. The voting rights and dividend ratio may be higher or lower than that of normal shares. From a legal perspective, the Companies Act permits a company to issue shares carrying differential voting rights when, among other conditions, the company has distributable profits and has not defaulted in filing annual accounts and returns for a minimum of three financial years preceding the year of offer. The issue of such shares cannot exceed 25% of the total issued share capital of the company.

It is now close to 9 years since the government permitted corporates to issue equity shares with differential voting rights. Tata Motors became the first Indian corporate to make a rights issue carrying DVR. Tata Motors rights offer combined an offer of two different classes of shares: one with full voting rights which were offered at Rs 340 in the ratio 1:6, and the other with one-tenth of the voting rights of the ordinary shares which were being offered at a discount of Rs 35 per share. These shares carried a rate of dividend that was 5% over the normal shares. In certain cases, DVR shares carry more voting rights than normal shares. Tata Motors had issued 6.4 crore shares with DVRs in November 2008 as a part of its Rs 4145 crore rights issue of which the ordinary rights issue was priced at Rs 340 a share, Rs 35 higher than the DVR shares. The company had announced that it would give 6% dividend on DVR shares while the dividend for normal shares was 1%.

From a corporate perspective, issuing DVR helps management at the time of hostile take-over threats. In such a case, the firm will have to issue shares with more voting rights than other shares giving the shareholders the power to control the firm’s decision. E.g. Karamjit Jaiswal and his unlisted firm, LP Jaiswal and Sons Pvt. Ltd, together owned 23.59% (8.59% by Karamjit Jaiswal and 15% by his firm) in liquor firm Jagatjit Industries. Following an approval by the board and shareholders of Jagatjit, LP Jaiswal and Sons subscribed to 2.5 million shares in Jagatjit Industries, increasing its stake to 19.1% from 15%.; each of these 2.5 million shares carried 20 voting rights. Karamjit Jaiswal later acquired around 2.19 million ordinary shares, increasing his stake to 13% from 8.59%. With this, he and LP Jaiswal together owned a combined 32.1% in Jagatjit Industries. However, because of the DVRs of the shares acquired by LP Jaiswal and Sons, this minority holding translated into voting rights of 62%, giving Karamjit Jaiswal complete control over the company as well as the means to fend off any attempt of a hostile takeover.

Investors are not as familiar with DVRs as they are with normal equity shares. Shares with DVRs are mainly targeted at passive investors. In most cases, small or retail investors hardly exercise their voting rights or come forward to manage the company. They acquire shares to make quick economic gains and so they give away their voting rights to those investors who can run the business in a profitable way.