Have you ever heard of DVR shares? In the year 2008, Tata Motors came out with the DVR shares for the first time in India. These DVR shares of Tata Motors trade at a discount of 50% compared to their normal shares. Later, this DVR issue approach of Tata Motors was followed by multiple companies like Jain Irrigation, Future Enterprises, Pantaloons India, etc.
What are DVR Shares?
First of all, many people have a misconception that DVR shares are similar to preferred shares. However, in reality, both these shares are different. Preferred shares usually do not carry voting rights.
On the other hand, DVR shares are similar to normal Equity shares. One notable difference in DVR and normal share is that the DVR equity shares have differential voting rights. A DVR share may have higher or lesser voting rights compared to an ordinary share. Another major difference is that the holders of DVR shares receive a higher dividend than ordinary shareholders.
Although both DVR shares and ordinary shares are traded in a similar way in the stock market, however, DVR shares are traded at a discount as they have generally offer lesser voting rights.
Why companies issue DVR shares?
Issuing DVR shares help the company in raising equity capital without adversely affecting its management and control. In other words, DVR shares result in bringing passive investors in the company’s list of members and can also protect the company from a hostile takeover in some scenarios. Moreover, as these company generally issues DVR shares at a considerably discounted price, this makes such shares attractive to prospective investors. Therefore, it enhances the likelihood of the company to raise a huge equity share capital.
Are DVR Shares good for retailers?
As stated earlier, DVR shares have generally fewer voting rights. However, if you are a retail investor with a small number of shares in a company, this type of share may be suitable as you are more concerned with dividends than voting rights.
Further, as these shares trade at a discounted price compared to the normal share, they may be more attractive for retail investors over normal shares. You can definitely consider investing in DVR shares of a company if you are looking to generate long-term wealth rather than seeking control in the issuer entity.
Also read: Case Study: Tata Motors Vs Maruti Suzuki
The concept of DVR shares looks like an attractive alternative for investors so far. After all, retail investors are more interested in getting dividends than attending Annual general meetings (AGMs). However, the concept of DVR shares is yet not flourishing in the Indian securities market because of a few common reasons.
For example, TATA Motors offer DVR shares, but only with 5% dividend advantage. Therefore, hypothetically, if dividend per ordinary share is Rs 10, the dividend on a DVR share is Rs 10.5. This makes the investors analyze whether it is worth waiving around 90% of voting rights for receiving a dividend hike of just 5%. (A Tata Motor DVR has 10 percent voting right as compared to an ordinary Tata Motor share).
Further, the majority of Institutional investors are more interested in checking a company rather than enjoying higher dividends. Therefore, financial Institutions show less interest in the DVR shares as they seek participation in managing the affairs of the company.
Overall, although the DVR shares seem to be advantageous for both the issuer company and the shareholders, one simply can’t ignore their shortcomings. Nonetheless, if these cons can be worked upon, the DVR shares can eventually become one of the best financial instruments in the Indian financial market.