As the name suggest, Differential Voting Right (DVR) shares provide different right of ownership as compares to ordinary shares. They have been allowed to issue in India since 2001.Since then only 4 companies had issued shares with DVRs shares.
Shares with DVRs shares are considered as a new product in the equity market. There have been numerous benefits both to the companies and to the investors who do not exercise their voting rights. If we look from the investor point of view, then they can earn better return in lieu of surrendering their voting rights whereas a company can issued equity without diluting their equity stake.
How the benefit arises?
Generally the target investors for DVRs shares are passive investors who do not intend to exercise their voting rights and are more interested in economic interest. DVRs shares decouple the economic interest from the voting rights. The company issued these shares at a discount price to these investors. As a result it works as a WIN WIN approach for both parties. These DVRs shares especially help the company at the time of thwarting hostile takeover.
Current situation
There are only 2 companies listed with DVRs shares .One is TATA Motors and another is by Pantaloons.
TATA Motors came out with its DVRs shares option in 2008 with right issue. The scheme was as follow
| Price | Rs 305 per share (Rs.35 discount per share) |
| Dividend | 5% higher than ordinary shares |
| Voting right | 1/10 of ordinary share |
Another issued by Pantaloon in the form of bonus shares. Although it does not lead to any fund raising but it was to create awareness among the investors about this new product.
Globally this is well accepted instrument especially among blue chip companies. But in India it is still in inception stage.
Legally Different
Section 86 of the Companies Act permits the issue of equity shares with DVRs, subject to conditions prescribed under the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2002
The Companies Act permits a company to issue shares carrying differential voting rights when, among other conditions, the company has distributable profits and has not defaulted in filing annual accounts and returns for a minimum of three financial years preceding the year of offer. The issue of such shares cannot exceed 25 per cent of the total issued share capital of the company.
On the other hand SEBI issued an amendment in equity listing with DVRs shares. Its amendment has a wider impact which says that a company shall not issue shares that have either superior voting rights or higher dividend entitlements, compared to the ordinary shares listed on the exchange. The rule is effective from July 21, 2009.
This rule make this unattractive this instrument for the investor unless they get higher discount or higher divided to compensate them.
This also leads to the problem of price discovery because a retail investor does not how much discount or divided will compensate him/her considering the volatility of the share.
When TATA Motors asked about the validity of the current DVRs, following were the responses of SEBI in respect some questions:-
| Question | Answer |
| Whether existing DVRs share swill continue to have their existing right | Yes |
| Whether TATA Motors can make fresh issue same terms as existing DVRs shares by way of bonus or right issue | Yes |
| Whether a fresh issue can be made by way FOP, preferential allotment and QIP subject to ICDR guidelines | Yes |
It seems that there are lot of confusion regarding the product and may kill the product in the future. The intent of SEBI amendment after 7 months after the TATA Motors issues seems to be concerned about the investors’ rights. It also seems that those who already issued DVRs shares before amendment may continue but for further issue of DVRs share are very unlikely.
Suggestions
I think SEBI should allow to other company to bring their equity listing based on DVRs shares that will help to create more awareness about these kind of product as well as the value of the voting among the shareholders. There are many AGM where the retail investors voting rights are considered negligible in the sense of their exercisable nature. So those investors should be compensated who are not looking any voting rights.
Apart from that if more companies will come out with this kind of equity listing, it will help to generate to price discovery formula for the company as well as for the investors.
No comments:
Post a Comment