15 Jun 2019, 10:05 — 8 min read
Background: Differential Voting Rights (DVR) shares are issued by a company so that they can prevent any inappropriate takeovers or dilution of voting right. It also helps investors who aren’t interested in taking control but are looking to invest big in a company. DVRs are generally compensated with a higher dividend rate and are great for small shareholders as they rarely execute their voting rights. Anisha Patnaik in her previous article explained why do you need Employee Stock Options Plan(ESOP). In this article she explains everything you need to know about DVR shares.
What are Differential Voting Rights share?
DVRs shares are like ordinary equity shares but they give fewer voting rights to a shareholder. They allow a company to dilute equity without a matching reduction in promoter’s stake. So, for instance, Gujarat NRE Coke company issued DVR shares in 2010. The investor has to hold 100 DVR shares for getting voting rights equal to one ordinary share.
Types of DVR
Eligibility/condition for issue of shares with DVR
*This provision shall not apply to private companies in case the Memorandum of Association (MOA) and AOA of the company provide otherwise.
DVRs shares are like ordinary equity shares but they give fewer voting rights to a shareholder.
Procedure for issue of shares with DVR
Difference between DVR shares and Ordinary Shares
Advantages of Issuing shares with DVR
From issuer perspective
From investor perspective
Disadvantages of DVR
From company perspective
From investor perspective
Case of Tata Motors
In 2008, Tata Motors issued 6.4 crore as DVR shares to fund the acquisition of Jaguar Land Rover. It was the first company in India to do so and amongst the very few in Asia. Issued at INR 305 a share, which was about 10% lower than the issue of normal rights at INR 340. The DVR shares would offer 5% dividend more, give an additional 10.3% discount and carry one-tenth of voting rights of ordinary shares. The DVR issue gives the shareholders more economic power in lieu of voting power. This helped Tata Motors raise INR 4,200 crore through a rights issue, including a DVR component of INR 1,964 crore.
Amazon caps voting rights in Witzig Advisory Services at 17%
Amazon bought 17% stake in the company through Class A shares and the rest 32% through Class B shares having differential voting rights (DVR). Each Class A share shall have one vote, while the Class B shares shall not carry any voting rights. This effectively caps Amazon’s voting rights in Witzig at 17%.
Amazon appears to have made use of DVR shares to comply with the new ecommerce FDI norms that came into force from February 1, and also to ensure that More can continue selling on its Indian marketplace. The new ecommerce FDI guidelines had forced Amazon to reduce its stake from 49% to 24% in Cloudtail and Appario, the two top sellers on its marketplace. The American e-tailer had also evaluated the idea of limiting its holding in Witzig to less than 26%, and not acquiring 49% in the company as was originally planned. By capping its voting rights in Witzig at less than 17%, Amazon will be able to continue with More as a seller. Samara Capital will hold 51% in Witzig, making the latter an Indian owned-and-controlled company.
For an investor, who wants to be in the company’s decision processes, DVR shares is not an attractive proposition due to limited voting rights. But if an investor isn’t concerned much with voting rights, then investing in the DVR would certainly be an attractive option.
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