Stock markets: Are differential voting rights shares a good investment opportunity? Check it out

DIFFERENTIAL Voting Rights shares, popularly known as DVRs, are like ordinary equity shares, but with different voting rights. DVRs provide the shareholders fewer voting rights than that of ordinary equity shares.

DVRs mostly trade at a discount and sometimes, the gap between DVR and ordinary shares is big, providing investment opportunities.

DIFFERENTIAL Voting Rights shares, popularly known as DVRs, are like ordinary equity shares, but with different voting rights. DVRs provide the shareholders fewer voting rights than that of ordinary equity shares. They are listed and traded in in the same manner as ordinary equity shares. Is it a good idea to have DVRs in your portfolio? Let us check it out.

Understanding DVRs

DVRs are similar to ordinary shares but carry lower voting rights and higher dividend. For instance, class ‘A’ DVR shares carry one tenth of voting shares which means one voting right for every 10 DVRs held. At the same time, this type of shares get 5% more dividend than that of ordinary equity shares. Generally, companies issue DVRs to prevent dilution of voting, hostile takeover and sometimes to fund large projects.

DVRs are mostly traded at a discount owing to the lower voting rights they carry. Globally, the discount rate is 10-12% but in India, they are traded at a discount of 40-50%. Ordinary shares and DVR shares tend to follow the similar pattern, of course, with a gap in price, and volumes of trade in DVRs are lower. Currently, only a handful of companies such as Tata Motors, Gujarat NRE Coke, Pantaloon Retail and Jain Irrigation have issued DVRs.

Should you buy DVRs?

There are several important factors that a retail investor needs to consider while buying DVRs. As we have discussed, DVRs mostly trade at a discount and sometimes, the gap between DVR and ordinary shares is big, providing investment opportunities. However, this gap will shrink over a period of time when everyone realises this as an opportunity and increase in awareness of this product and price of the DVRs will go up.

DVRs are a good investment opportunity for those investors who are keen to receive higher dividends and are not interested in attending annual general meetings of the companies and take part in decision making and voting process.

Similarly, as an investor if you are bullish on the company’s long term prospects, you may look at investing in its DVRs as it provides an opportunity to receive higher dividend and also take part in the company’s growth via capital appreciation.

However, before investing in DVRs, you should be convinced about the company’s future prospects and its fundamentals, and most importantly, management. Otherwise, there is no merit in giving up your voting rights for a lower price and it may not yield you the desired returns.