Shares with Differential Voting Rights (DVRs) means shares that give the holder differential rights as to voting (either more or less voting right) as against the Ordinary shareholders of the company.
Types of Differential Voting Rights (DVRs)
- Shares that have superior voting rights
- Shares that have inferior voting rights
Eligibility/Condition for issue of shares withDifferential Voting Rights (DVRs)*
- Articles of Association of the Company should authorize issue of Differential Voting Rights (DVRs);
- Consistent track record of distributable profits for the last three years;
- No default in filing annual return for last three Financial Years;
- No default in payment of declared dividend or repayment of deposit or loan borrowed;
- the shares with differential rights shall not exceed twenty-six percent of the total post-issue paid up equity share capital;
- No penalty by court or tribunal for any offense for the last 3 Financial Years; and
- The shares issued withDifferential Voting Rights (DVRs) cannot be changed later.
*This provisions shall not apply to private companies in case MOA and AOA of the company provide otherwise.
Procedure for issue of shares with Differential Voting Rights (DVRs)
- Check Articles of Association of the Company;
- Obtain valuation certificate from registered valuer;
- Open a separate bank account;
- The terms of issue of shares should be finalized;
- Conduct board meeting for issue of shares with Differential Voting Rights (DVRs);
- In case issue of Differential Voting Rights (DVRs) affects the rights of existing class of shares then obtain consent from 3/4th of the shareholders of that class;
- Filing form MGT-14 with ROC within 30 days of EGM;
- Circulate offer letter along with the share application form to the investors;
- Receive share application money along with the application form ;
- Conduct board meeting for allotment of shares;
- File form PAS-3 within 15 days of allotment of shares;
- Pay stamp duty and issue share certificates; and
- Make entry in register of members.
Difference between Differential Voting Rights (DVRs) shares and Ordinary Shares
Differential Voting Rights (DVRs) SHARES
- Provide few or higher voting right to shareholders.
- Rate of dividend is low or higher.
- DVR shares are ideal for small shareholders or promoters.
- Issued at a discount in comparison with ordinary shares.
ORDINARY SHARES
- One share One Vote.
- Rate of dividend is fixed for class of shareholders.
- Ideal for large shareholders.
- Issue at FMV.
Advantages of Issuing shares with Differential Voting Rights (DVRs)
FROM ISSUER PERSPECTIVE
- To raise more capital without diluting its ownership structure.
- Get control in decision making process.
- A tool to avoid hostile take over.
- To fund large Project.
FROM INVESTOR PERSPECTIVE
- Benefit to investors since share are issued at discount & also for incremental dividend.
- Better for investors who are looking for good quick return rather than voting rights.
- Institutional Investors can invest in private companies without any limit and making it a subsidiary.
Dis-advantages of Differential Voting Rights (DVRs)
FROM COMPANIES’ PERSPECTIVE
- Lack of investor awareness about such issue of shares.
- Issue shares at discount.
- Minority shareholders can lose faith in the Company.
FROM INVESTOR PERSPECTIVE
- Lack of investor awareness about such issue of shares.
- Possible misuse of voting power
- by the promoters & hence act
- against the interest of the shareholders.
- Lack of liquidity may hamper return.
- Not beneficial for Institutional
- Investors as they are
- interested in voting rights and long term capital gains both.
Case of Tata Motors
- In 2008, issued DVR shares.
- It was the first company in India to issue DVR shares and amongst the very few in Asia.
- Issued at Rs 305 a share which was about 10% lower than the issue of normal rights at Rs.340.
- Will offer 5% of more dividends.
- Gives an additional 10.3% discount.
- But carry one-tenth the voting rights of ordinary shares. This means 10 DVR shares = 1 ordinary share as far as voting rights is concerned.
Amazon caps voting rights in Witzig Advisory Services at 17%
- Amazon has bought 17% stake in the company through Class A shares and the rest 32% through Class B shares having differential voting rights (DVR).
- Each Class A share shall have one vote, while the Class B shares shall not carry any voting rights. This effectively caps Amazon’s voting rights in Witzig at 17%.
- Amazon appears to have made use of DVR shares to comply with the new ecommerce FDI norms that came into force from February 1, and also to ensure that More can continue selling on its Indian marketplace.
- The new ecommerce FDI guidelines had forced Amazon to reduce its stake from 49% to 24% in Cloudtail and Appario, the two top sellers on its marketplace. The American etailer had also evaluated the idea of limiting its holding in Witzig to less than 26%, and not acquiring 49% in the company as was originally planned.
- By capping its voting rights in Witzig at less than 17%, Amazon will be able to continue with More as a seller. Samara Capital will hold 51% in Witzig, making the latter an Indian owned-and-controlled company.
Conclusion
- For an investor, who wants to be in the company’s decision processes, DVR shares is not an attractive proposition due to limited voting rights.
- But if an investor isn’t concerned much with voting rights, then investing in the DVR would certainly be an attractive option.
