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. Tata Motors, Gujarat NRE Coke, Pantaloon Retail, Jain Irrigation are some of the Indian companies that have issued DVR shares.
For example: Tata Motors’ DVR shares carry voting rights which are one-tenth of the ordinary equity shares. 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 10 DVR shares to cast one vote. The DVR shareholders are entitled to an additional 5% dividend, over and above the ordinary equity shareholders. Tata Motors DVR were trading at 245.55 or 38% discount to the ordinary shares, which are at trading at Rs 390.25 (July 2015) .
Companies issue DVRs for several reasons such as prevention of a hostile takeover, bringing in a passive strategic investor or dilution of voting rights. DVR investors are generally compensated with a higher dividend rate. This makes the DVRs attractive for retail investors who do not want control in the company, but are looking at the long-term growth prospects.
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 30-50%. 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 regular 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.