What are Differential Voting Rights (DVR) shares?
Differential Voting Rights (DVRs) shares provide shareholders with either higher or lower voting rights in comparison to ordinary shareholders of the company. When a shareholder has higher voting rights in a ratio of 10:1, it means they have 10 votes per share held. Conversely, lower voting rights in a ratio of 1:10 means having 1 vote for every 10 shares held.
However, Indian regulations prohibit companies from issuing equity shares with higher voting rights. As a result, the DVR shares available in the market typically have limited voting rights. These shares are traded on the stock exchange similar to ordinary shares but often at a discounted price and with a higher dividend.
A Tata Motor DVR has 10% voting rights compared to an ordinary Tata Motor share.
||Tata Motors||Tata Motors DVR|
|Voting Rights||1:1 (1 voting right per share.)||1:10 (1 voting right for every 10 shares held.)|
|Dividend payout||Lower dividend than Tata Motors DVR||5% more dividend than Tata Motors|
Reasons for issuing DVRs
- Prevention of hostile takeover: Since DVRs are issued with limited voting rights, they do not dilute the promoters voting rights and make it difficult for hostile takeovers.
- Bring in Passive/Retail investors: Passive/Retail investors may not want to indulge in the managerial operations of a business in which they are investing. In most cases, such investors are looking only to make profits. DVR shares are ideal as investors can focus on the dividend generation aspect, without needing to deal with the decision-making aspect of the company. DVR shares are offered at a discount compared to ordinary shares because of the lower voting rights. In turn, investors can acquire more shares at a lower price, thus increasing their dividend earning potential.