In business, owning one share usually means one vote. This was the case until the early 2000s when the first differential voting rights (DVR) came into existence. A DVR share can either have higher or lower voting rights than an ordinary share, based on the circumstance and company policy.
In India, companies are not allowed to issue shares with multiple voting rights. Therefore, here, the only use of DVR is to limit the voting rights of equities. Before proceeding to learn about the difference between DVR and ordinary shares, one must gauge what these two options mean.
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Shares that provide ownership capital to its owners are ordinary shares or standard equities. Such shareholders generally vote at Annual General Meetings or AGMs. Owning one share would mean that an individual has a voting right. Moreover, such shareholders receive returns for their contribution of capital to a business.
The company decides the payment of such dividends to these shareholders. Typically, the dividend amounts tend to vary throughout the year due to increased volatility in the market.
What are Differential Voting Rights Stocks?
Before learning the difference between ordinary shares and DVR shares, one should understand what DVR stocks entail. A DVR share enables its owners to acquire increased dividend earnings by sacrificing their voting rights. Therefore, such stocks can assist a business to proffer most of the decision-making power at the hands of shareholders with superior voting rights.
As per the Companies Act, 2013, any business, which has reported profits in at least three preceding years from DVR issue date, can undertake such a move. However, some other conditions must be fulfilled, as well. During this profitable period, the company must have filed returns and annual accounts without any discrepancy.
Lastly, the issued DVR value must not exceed 25% of the company’s share capital.
To understand the difference between ordinary shares and DVR shares, take a look at the table below –
|DVR Shares||Ordinary Shares|
|Individuals with DVR shares will have lower voting rights than those with ordinary shares.||Ordinary shares always have increased voting rights when compared to DVR stocks.|
|DVR stocks provide a higher dividend to owners as a form of compensation for the lower voting rights.||Ordinary share dividend is always lower than DVR since such shareholders retain the right to vote and make important company decisions.|
|DVR shares are priced lower, as they are often extended at discounts.||Ordinary shares are not sold at discounts, which is why they tend to be priced higher.|
Now that the difference between DVR and ordinary share is abundantly clear, one should know about similarity as well. Both of these kinds of stocks retain certain rights, such as the bonus shares and share issue rights.
Seasoned investors know that, in most cases, DVR share investment is highly beneficial for their portfolio. Here are some reasons why this is so –
- No hassle with company decisions
An investor may or may not want to involve himself/herself with the day-to-day matters of a business where they want to invest. In most cases, such individuals are looking to earn a hefty profit without being bogged down by such decision-making responsibilities. DVR shares present an ideal opportunity to focus on the dividend generation aspect, without needing to deal with high-level company decisions.
- More affordable than ordinary shares
Companies offer DVR stock at a significantly lower price when compared to the listed stock market prices. This is primarily because of the lower voting rights associated with these shares. Thus, as a trade-off, prices are lowered. In turn, an investor can acquire a greater amount of such shares on a limited budget than normal shares. This also improves one’s dividend earning potential.
- Better return on investment
DVR stocks fetch significantly higher returns for their owners as compared to an ordinary stock. This is one of the major differences between DVR and ordinary share. In fact, the gap in earnings between these two options can sometimes be as high as 20%. Combined with the discounted prices, the increased profit generation ensures hefty earnings for investors.
Differential voting right stocks have failed to captivate the Indian market even with their share of benefits. The reason behind this can be understood by analysing an example. TATA Motors offers DVR stocks with a dividend earning advantage of just 5% over ordinary shares.
However, in exchange, such a share reduces the owner’s voting rights by 90%. Most investors find this trade-off disadvantageous, which, in turn, discourages them from investing in DVR shares. Such shortcomings are holding back DVR shares from attaining its full potential in the Indian landscape.