A DVR or Differential Voting Rights share is just like an ordinary equity share, but with voting fewer rights. For example, while a normal Tata Motors shareholder can vote as many times as the number of company shares he/she holds, those who hold DVR shares will need to hold 100 DVR shares to cast one vote. World over many famous companies such as Google, trade shares with different voting rights (DVR). In India it was Jagatjit Industries that was the first to do a DVR.
Companies issue DVR shares to prevention any hostile takeover and dilution of voting rights. This also helps strategic investors who are looking at a big investment in a company, but with fewer voting rights. Some of the companies who have issued DVRs, which are traded in NSE, include Tata Motors, Pantaloons, Jain Irrigation systems and Gujarat NRE Coke.
Is it suitable for retail investors to invest in DVR shares?
These are good instruments for long-term investors, typically small investors, who seek higher dividend and are not much interested in voting rights. Mostly, these shares trade at a discount to their corresponding equity shares and the discount rate ranges from 30-40%. If a retail investor decides to invest in a company’s share based on the fundamentals, the same could be done in the company’s DVRs.
The following reasons support investing in DVRs:
1. The discount factor – the company’s share available at a lesser price for the same fundamentals. There is a chance of these discount being reduced, due to market forces. And this could provide some more appreciation, than the stock itself.
2. There is a chance of higher dividend being given than the regualar equity shares.(For e.g, Tata motors declared a higher dividend for DVRs).
What are the disadvantages?
DVR shares are usually thinly traded, which means these are illiquid stocks. Also, during bearish phase of the markets, the discount could widen and this could be a dampener factor. But, caution should taken that an investor should not invest, just because the DVR is available at a large discount.
Other than the few disadvantages mentioned above, the DVRs are good instruments for medium to long-term investors, provided the fundamentals warrant in investing in the company. Over time as investors feel more familiar with such type of instruments, more issues would follow and maybe the discounts would narrow.