According to the Companies Act, 2013, companies limited by shares can issue DVRs, but it will be as a part of the company’s share capital. Ideally shares with differential voting rights are considered to be a robust means of raising capital without giving up control over the company.
Shares with DVR are essentially similar to an ordinary share. However, it extends limited voting rights to the shareholders.
Typically, the number of shares with DVR to be held by each company differs from one firm to another. Nevertheless, shares with DVR cannot be more than 25% of the aggregate issued share capital.
Usually, companies decide to issue shares with DVR because of these following reasons –
In 2008, the renowned brand Tata Motors issued 6.4 crore shares with DVR at Rs. 305/ share to raise funds. The main objective of the issuance was to raise enough funds to acquire Jaguar Land Rover. The said DVR extended 1/10th voting rights of the company’s ordinary shares and offered 5% more dividends to the investors.
Companies need to meet these conditions for the issuance of shares with different voting rights.
One must remember that DVR shares cannot be changed. Companies should make it a point to find out about these eligibility criteria and other requirements in detail to align the issuance accordingly. However, there are no such rigid eligibility criteria for investing in shares with differential voting rights.
SEBI released the ‘Consultation Paper’ on the issuance of shares with DVR in March 2019. The paper addressed the need to allow issuance and listing of DVR shares in India.
SEBI also proposed to monitor and regulate the issuance of DVR shares under these heads –
Some of the other significant proposals include –
Individuals may consider going through the Consultation Paper to avail in-depth knowledge about propositions of differential voting right SEBI.
these pointers below highlight the significant advantages of shares with differential voting rights –
a. For investors
b. For issuers
Shares with DVR have their limitations as well. Both issuers and investors should be aware of them.
These following pointers provide a fair idea about the disadvantages of shares with differential voting rights –
Since several parallels are drawn between differential voting rights shares and ordinary shares, one may consider becoming familiar with their underlying differences.
This table below highlights the differences between shares with DVR and ordinary shares –
|Parameters||DVR Shares||Ordinary Shares|
|Voting rights||They may provide a few or higher voting rights.||One ordinary share is equivalent to one voting right.|
|Rate of dividend||It can be either high or low.||It is fixed for a class of shareholders.|
|Suitability||These shares are suitable for small stockholders or promoters.||These shares are suitable for large stockholders.|
|Issuance price||It is issued at a discount.||It is issued at the FMV or fair market value.|
Hence, keeping all these aspects in mind, one may decide whether shares with differential voting rights are ideal for them or not. Above all, individuals should keep in mind their financial goal and risk-taking capability at all times.