What are Differential Voting Rights (DVR) shares?

 

 

Ø In a normal scenario, whenever a company wants to raise capital, there are two traditional sources of funds - Debt and Equity.

Ø When raising funds through Equity issuance, it typically impacts the ownership structure of the company.

Ø But what if a company wants to raise funds through the Equity route in a manner which has limited impact on the ownership structure adversely.

Ø For example, what if a company wants to raise funds through Equity but at the same time wants to limit the dilution of ownership?

 

Here comes into picture, Differential Voting Rights (DVR) shares.

 

Differential Voting Rights (DVR) shares are shares with either higher voting rights or lower voting rights as compared to ordinary shares of the company.

·       Ordinary shares operate on the principle of 1 share equal to 1 vote. 

·       As opposed to that, Differential Voting Rights (DVR) shares either have fractional/lower voting rights or superior/higher voting rights.

 

Superior/Higher Voting Rights 

If a shareholder has DVR shares with higher voting rights in the ratio of 5:1, it means the shareholder has 5 votes per 1 share held.

 

Fractional/Lower Voting Rights 

And if a shareholder has DVR shares with lower voting rights in the ratio of 1:5, it means the shareholder has 1 vote for every 5 shares held.

 

Indian Context

·       In India, there are strict regulations for companies to issue DVR shares with higher voting rights keeping in view the potential exploitation that may take place of minority shareholders.

·       Thus, normally the DVR shares found in India, are with lower voting rights.

 

·       One of the classic example is 

 

Tata Motors Ltd. Differential Voting Rights Shares - TATAMTRDVR

 

Ø In the case of TATAMTRDVR, it is a DVR share with lower voting rights in the ratio of 1:10, meaning 1 vote for every 10 shares held.

Ø Generally, the DVR shares with lower voting rights have higher dividend payout.

Ø Even in the case of TATAMTRDVR, it has 5% more dividend payout than ordinary shares of Tata Motors.

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