The DVR play
Differential voting rights shares, commonly known as DVR shares, have been in the news for a more-than-decent rally and beating ordinary shares in returns. Four companies in India, Tata Motors, Jain Irrigation, Gujarat NRE Coke and Future Enterprises, have issued DVR shares - which have no or limited voting rights and so are issued at a discount to the ordinary shares. Their aim is to prevent dilution of promoters' powers and hostile takeovers.
The biggest dip in this discount has been in Future Enterprises. Its DVR share was trading at a discount of 57 per cent to its ordinary share on April 30, 2015. This fell to 37 per cent on May 31, 2016, and 4.22 per cent in April 2017. The debt-laden Gujarat NRE Coke also saw the gap between DVR and ordinary shares close from 59 per cent on March 31, 2014, to 18 per cent in April 2017. In case of Jain Irrigation and Tata Motors, too, the discount has fallen sharply from levels seen three years ago.
For small investors, it makes sense to invest in DVR shares as most of them do not exercise their voting rights anyways. However, of late, the price difference, or the discount, seems to be contracting in India. "Globally, it has been seen that the discount between ordinary and DVR shares narrows in bull markets as investors give up their rights and opt for value," says Jimeet Modi, CEO, SAMCO Securities.
India allowed DVR shares in 2000. Tata Motors was the first to issue these in 2008. The aim was to raise money for acquisition of Jaguar-Land Rover while ensuring that voting rights of existing shareholders are not diluted. In India, the discount is wider than in more developed countries, as it is a relatively new product and companies have to leave something on the table to attract investors. For instance, Alphabet, Google's holding company, offers shares with no voting rights called Class C shares. But the price difference between Class A shares and Class C shares is 2 per cent. "As we become more developed, the discount between ordinary shares and DVR shares is expected to fall to 5 per cent, the global standard," says Modi.
The Dual Share System, or issue of equity shares with different voting and dividend rights, was first introduced in 1844 in Germany, where railway corporations issued preference shares without voting rights. A half-century later, the US, too, introduced dual-class shares. Between 1926 and 1985, the New York Stock Exchange (NYSE) prohibited these shares with a few exceptions. One exception was made for Ford Motor Company. As on June 30, 2016, Ford affiliates held 70 million shares and controlled 40 per cent voting power, whereas 3.9 billion common outstanding shares had just 60 per cent voting rights. As per a report by the American Society of Appraisers, 15 per cent of US initial public offers, or IPOs, in 2015 had dual class structure, up from 12 per cent in 2014 and just 1 per cent in 2005. In 2014, e-commerce giant Alibaba Group Holding opted to list on the NYSE rather than in Hong Kong as the latter refused to accept the company's dual-class shareholding structure. Now, there are reports that Hong Kong may allow the system. Singapore, too, plans to follow suit. In the US, DVR shares were initially used by media companies to prevent hostile takeovers.
In India, the Companies Rules, 2001, do not allow a company to come out with an IPO of DVR shares before an IPO of equity shares with full voting rights. This is to ensure public participation in decision making. Also, DVR shares cannot account for more than 25 per cent share capital.
Each company gives different rights to their DVR shareholders. Tata Motors and Jain Irrigation allow one vote per ten shares. Tata Motors compensates for fewer voting rights through an extra 5 per cent dividend. Future Enterprises allows three votes per four shares and pays 2 per cent additional dividend. Gujarat NRE Coke allows one vote for 100 shares.
Deepak Jasani, Head, Retail Research, HDFC Securities, says, "Retail investors can buy DVR shares as a lower cost tracking mechanism for underlying shares. This means they can buy when they are bullish on the underlying, as doing so entails a lower outgo. But they should be aware of the possibility of the discount widening. They should not buy DVRs just in the hope that the discount will narrow."
However, there is one limitation - these shares are not very liquid. The average one-year traded volume for Tata Motors DVR shares as on April 28, 2017, was 23,22,650, compared to 86,78,430 for ordinary shares. Future Enterprises DVR's one-year average volume was 96,780 as compared to 15,40,410 for ordinary shares. So, one should invest carefully.
@avn_kaur
