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.
What are Differential Voting Rights?
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.
Why Do Companies Issue DVR Shares?
Usually, companies decide to issue shares with DVR because of these following reasons –
- To avoid a hostile takeover.
- To bring in retail investors.
- For safeguarding voting rights against dilution.
Example of DVR Share Issuance
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.
Eligibility Criteria to Issue DVR Shares
Companies need to meet these conditions for the issuance of shares with different voting rights.
- The issuance of share should be authorised by the Article of Association of the Company.
- Companies must have a record of distributable profits for the past 3 years.
- There should not be any default in filing the annual returns for the past 3 financial years.
- There was no default in repaying deposits or loans. Also, the payment of the declared dividend was not delayed.
- There was no penalty ordered by the tribunal or court for the past 3 years.
- DVR shares shall not be more than 26% of the post-issue paid-up equity capital.
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 and Issuance of DVRs
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 –
- Companies whose equity shares are listed.
- Companies whose equity shares are not listed by are proposed for public offering.
Some of the other significant proposals include –
- A company’s SR shares’ face value shall be the same as its ordinary equity shares.
- Sr shares shall be under perpetual lock-in post IPO.
- Once the ordinary shares of a company have been listed, it is not allowed to issue SR shares.
- The voting rights accompanying SR shares shall not be more than the ratio of 10:1. Once a company adopts a ratio, it will be valid for subsequent issuance.
- A company is allowed to issue only a single class of SR shares.
- After IPO, SR shares will be treated as ordinary equity shares (regarding voting rights) under specific circumstances.
Individuals may consider going through the Consultation Paper to avail in-depth knowledge about propositions of differential voting right SEBI.
Advantages of Differential Voting Rights Shares
these pointers below highlight the significant advantages of shares with differential voting rights –
a. For investors
- Investors tend to benefit as shares are issued at a discounted rate and also provide an incremental dividend.
- Institutional investors may invest in private companies without being subject to any limit. They can also make it a subsidiary.
- Proves useful for generating quick returns.
b. For issuers
- It proves useful in raising capital without the ownership structure being diluted.
- Helps prevent hostile takeovers.
- Provide control in the process of decision making.
- DVR shares also come in handy for financing large projects.
Shares with DVR have their limitations as well. Both issuers and investors should be aware of them.
Limitations of Differential Voting Rights
These following pointers provide a fair idea about the disadvantages of shares with differential voting rights –
- For investors
- Investors are often unaware of the issuance of DVR shares.
- Misuse of voting power by the promoters against stockholders’ interest.
- Lack of liquidity.
- Institutional investors looking for capital appreciation and voting rights may lose interest.
- For issuers
- The shares are issued at a discounted rate.
- Investors are often unaware of the issuance.
Since several parallels are drawn between differential voting rights shares and ordinary shares, one may consider becoming familiar with their underlying differences.
Difference between Shares with Differential Voting Rights and Ordinary Shares
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.