DVR – Shares with a difference

DVR stands for Differential Voting Right. DVR shares are like ordinary shares, but with fewer voting rights. These allow a company to dilute equity without a matching reduction in promoters' stake. The aim of limiting voting rights is to prevent hostile takeovers by separating economic interests and voting rights.

DVR shares are ideal for small shareholders as they rarely exercise their voting rights. This is because they mostly dont understand the company's affairs in such detail that they can influence its actions. They buy shares only to make money and so happily give away voting rights in favor of those who have management control.

DVR shares are priced lower at issuance and offer higher dividends; in return, the voting rights are limited. For instance, the holders of Tata Motors' DVR shares can cast one vote for every 10 shares held. However, they get 5% more dividend than ordinary shareholders.

DVRs usually trade at a discount which is comparatively higher in India when compared with the developed markets. Low liquidity can be one of the reasons for the discount as large institutional investors may find it difficult to trade in volumes. DVR shares have also not gained acceptance in India due to lack of awareness. Four Indian companies, Tata Motors, Pantaloons Retail India, Gujarat NRE Coke and Jain Irrigation Systems have issued DVRs so far.

Taking the example of Tata Motors' DVR as it is the most popular amongst the above shares; it is currently trading at ~43% discount to ordinary Tata Motor shares. However we expect with increased awareness & in a bull market phase the discount should narrow down & thus the performance in DVR shares is likely to be better than ordinary shares. This comes with the additional benefit of higher dividends & dividend yields.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

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