Differential Voting Rights (DVR)

Differential Voting Rights (DVR) shares are a class of equity shares that grant unequal voting rights to shareholders, allowing companies to maintain control while offering investors certain benefits. These shares offer different voting power than ordinary shares, and they are typically issued by companies looking to raise capital without diluting ownership.

Differential Voting Rights (DVR) refer to shares that provide varying levels of voting power to shareholders, compared to ordinary shares. While ordinary shares typically carry one vote per share, DVR shares may have more or fewer voting rights per share. This allows companies to raise capital while still maintaining control, as promoters and founders can retain more voting power despite owning fewer shares.

Companies issue DVR shares for several reasons:

• To protect promoter control: By issuing shares with fewer voting rights, promoters can raise capital without losing control of the company.
  

• Capital raising without dilution: Companies can attract investors without diluting the promoter's decision-making power.
  

• To attract long-term investors: DVR shares may appeal to investors looking for stable returns, as they typically offer higher dividends in exchange for limited voting rights.
  

An example of DVR share issuance is Tata Motors DVR. Tata Motors issued DVR shares with a lower voting right, offering a higher dividend yield to compensate for the reduced influence in company decisions. For example, if the ordinary shares have 1 vote per share, the DVR shares might only have 1/10th or 1/100th of the voting power, but they offer a higher dividend to attract investors.

Under the Indian Companies Act and SEBI guidelines, companies wishing to issue DVR shares must meet specific criteria. These include:

• A minimum net worth requirement.
  

• No default on loan repayments.
  

• The company must be profitable and meet specific performance criteria.
  

• Companies must comply with regulatory requirements set by SEBI, including disclosing the terms of the DVR shares and maintaining transparency.
  

SEBI has set regulations governing the issuance of DVR shares. In 2019, SEBI allowed companies to issue superior rights shares (DVR shares) under certain conditions. These regulations ensure that such shares are issued transparently and protect investors interests. Companies issuing DVR shares must meet strict guidelines and disclose the rights associated with the shares to protect shareholder interests.

DVR shares offer several advantages for both companies and investors:

• For Companies: They can raise capital without diluting control, as promoters retain greater voting power.
  

• For Investors: DVR shares typically offer higher dividend incentives and are available at a lower price than ordinary shares, this may appeal to investors seeking stable returns with less voting influence.
  

While DVR shares have their advantages, they also come with certain limitations:

• Limited voting rights: Investors in DVR shares have less influence over company decisions, as voting rights are diluted.
  

• Poor liquidity: DVR shares may have lower trading volumes compared to ordinary shares, which can make buying or selling more difficult.
  

• Undervaluation risk: Due to limited voting rights, DVR shares may be perceived as less valuable, leading to lower demand and potentially undervaluation.
  

• Regulatory restrictions: Companies must adhere to strict SEBI guidelines and conditions when issuing DVR shares, limiting flexibility.
  

DVR shares strike a balance between providing companies with capital while allowing promoters to maintain control over decision-making. They offer investors the opportunity for higher dividends, but at the cost of limited voting rights. DVR shares may suit investors seeking stable returns without voting influence, though they come with risks such as lower liquidity and potential undervaluation.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.