Share with Differential Voting Rights (DVR): Are they worth looking at

December 13, 2010

What are DVR shares?

DVR shares are like ordinary equity shares but with differential voting rights. They are listed and traded in the same manner as ordinary
equity shares. However, they mostly trade at a discount as they provide fewer voting rights compared to ordinary equity shares.
Companies generally compensate DVR investors with a higher dividend.
Why they are issued?
Companies issue DVRs for reasons such as prevention of a hostile takeover and dilution of voting rights. However, this also helps
strategic investors who do not want control but are looking at a reasonably big investment in a company. At times companies issue
DVR shares to fund new large projects, as due to the fewer voting rights, even a big issue does not trigger an open offer.
Indian Context:
Tata Motors Differential Voting Rights (DVRs) shares, the first of their kind in India, are trading at a discount. Tata Motors had made a
rights issue in 2008 to fund the Jaguar Land Rover acquisition. The rights issue comprised two components: 64.3mn ordinary equity
shares at Rs330 a share and 64.3mn DVR shares at Rs295 a share. DVRs have one-tenth voting rights and carry a higher dividend
entitlement of 5% compared with ordinary equity shares. Currently promoter holding in DVRs is 36.3% (almost equal to their holding in
equity shares of Tata Motors) versus 84.3% in December 2008. The maximum offloading by the promoters was done in the Dec 2009
and June 2010 quarters.
Following the Tata Motors DVR issue, two more Indian companies, Pantaloon Retails India and Gujarat NRE Coke, have made DVR
issues.
Pantaloon Retail issued one bonus share with different voting and dividend rights for every 10 held in Nov 2008. The new shares called
Class B shares will get 5 per cent more dividend than ordinary shares and would be entitled to one vote for every 10 held.
Gujarat NRE Coke Ltd in May 2010 issued differential voting rights (DVR) bonus shares in the ratio of one DVR bonus share for every
10 equity shares held in the company. The DVR bonus shares would hold a voting right which was one-hundredth of an ordinary share.
Regulatory Developments:
As per the SEBI guidelines, existing DVR holders can have superior dividend rights along with their existing rights. SEBI in its informal
guidance said Tata Motors can issue fresh DVR via bonus/rights on same terms. Also, the company can issue fresh DVRs via follow on
public issue (FPO) and preferential issue route. According to the market regulator, Tata Motors can covert Convertible Alternative
Reference Securities (CARS) and employee stock ownership plan (ESOPs) into DVRs under existing terms.
The above informal guidance specific to Tata Motors (issued in Apr 2010) is legally enforceable and has not only underlined the legal
validity of the company's DVRs, but also allowed it to issue fresh DVRs with same terms by way of bonus or rights, follow on public
issue, preferential allotment and qualified institutional placements and issue of employee stock options convertible into DVRs. This
guidance cleared all the doubts that arose after the SEBI amendment of listing agreement clause 28A on July 2, 2009 that specifically
barred companies from issuing "in any manner which may confer on any person, superior rights as to voting or dividends vis-a-vis the
rights on equity shares that are already listed".
Global Context:
Some of the global companies that have issued shares with differential voting rights include Berkshire Hathaway, Google and News
Corp. Upon studying various DVRs listed in the US markets to understand pricing of DVRs, it seems that:
Discount on DVRs generally ranges from 0-10%. DVRs of Berkshire Hathaway, for instance, trade on par with ordinary equity shares.
A higher dividend rate on DVRs reduces the discount. When dividend on Newscorp DVR reduced in 08, discounts widened. This

suggests that investors were placing a value on higher dividend rates.

Investors perceive voting rights to be more important especially when the company or the financial market is going through a rough

patch. During this period, discounts tend to widen as investors prefer to have more decision-making rights in the company. This is
visible from widening of discount rates during the phase of the global financial crisis during 2008.

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Current scenario of DVRs in India:

Company

Share Price
Equity
DVR
1248.1
787.9
56.2
36.0
350.3
294.5

Tata Motors
Gujarat NRE Coke
Pantaloon Retail

Current Discount
of DVR shares 52 week High in
vs Eq shares
discount rate

5 Days Average Share

Volume (NSE)
Equity
DVR
6187651.0
789948.0
2935683.0
28812.0
331022.0
11642.0

36.9%
36.0%
15.9%

52 week Low in
discount rate

43.7%
41.7%
45.0%

21.3%
23.3%
14.9%

DVRs mostly trade at a discount, largely due to the fewer voting rights they enjoy. However, at times, the gap between DVR and
ordinary shares is big, providing good opportunity to investors.
Price differentials have many reasons, including lack of awareness, hesitation by investors and lower liquidity in the counter. But, if you
have faith in the company or the group and at the same time there is enough discount to the ordinary shares, it could be a rewarding
instrument. The additional gains could come from a reduction in the price difference between ordinary and DVR shares.
The only caveat is that before investing in a DVR, investors need comfort about the companys fundamentals and prospects, and more
importantly, its management. Unless you are not confident on these counts, giving up voting rights for a lower price may not give the
desired returns.
Investing in DVR (differential voting rights) shares can be a good option for generating higher returns, given the huge discounts they are
trading at as well as the higher dividend.
50.0%

1200.0

40.0%

20.0%
400.0

10.0%

Tata Motors DVR

5-Nov-10

5-Sep-10

5-Jul-10

40.0%
340.0

30.0%

200.0

20.0%

60.0

10.0%

Pantaloon EQ

03-Dec-10

07-Oct-10

10-Aug-10

20-Apr-10

15-Jun-10

17-Feb-10

16-Dec-09

20-Oct-09

27-Apr-09

Pantaloon DVR

19-Aug-09

Discount %

24-Jun-09

22-Nov-10

2-Nov-10

13-Oct-10

23-Sep-10

3-Sep-10

Gujarat NRE Eq

19-Feb-09

Gujarat NRE DVR

14-Aug-10

25-Jul-10

5-Jul-10

15-Jun-10

20.0%
26-May-10

30.0

50.0%

480.0
Price

30.0%

40.0

Discount %

Price

40.0%

50.0

Discount %

Comparison of Pantaloon DVR price with

Pantaloon Eq

50.0%

60.0

5-May-10

Tata Motors Eq

Comparison of Gujarat NRE DVR price with

Gujarat NRE Eq

70.0

5-Mar-10

5-Jan-10

5-Nov-09

5-Sep-09

5-Jul-09

5-May-09

5-Jan-09

5-Mar-09

0.0%
5-Nov-08

0.0

Discount %

Price

30.0%
800.0

Discount %

Comparison of Tata DVR Price With Tata Motors Eq

1600.0

Discount %

Betting on the assumption that the discount of DVR to the normal shares would narrow/disappear going forward may not work as the
Tata Motors DVR still quotes at a hefty discount of close to 37% to its equity shares even after 2 years of its issue.
In the case of Tata Motors DVR, the discount widens when there is a sustained institutional buying in a limited period of time.
(Institutional holding in Tata Motors normal equity has risen consistently from 25.3% in Mar 2009 to 41.4% in Sept 2010). This discount
narrows when the buying dries up. This happen because the fresh buyers typically concentrate on the normal equity shares and not the
DVR (even if they are available cheap), due to fears of liquidity in DVRs. The only exception was in the June 2010 quarter when the
institutional shareholding rose from 35.3% to 50.2% in the DVR segment.

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In the case of Pantaloon Retail and Gujarat NRE Coke, the institutional holding in their DVRs has constantly fallen and that of noninstitutional risen.
As more companies start making DVR issues, market awareness about this would spread and the discount on DVRs would be
determined by market dynamics. We believe that as the Indian markets become more familiar with this instrument, the discount should
come down sharply to 10-15% from the current levels over the medium to long term.
Hence to sum it up, one need not bank only on narrowing in the discount between the DVR and equity shares while buying a share. If
that happens it would be an additional bonus. One needs to be comfortable with the stock, the promoters etc before taking such a call.
If the stock price moves up due to micro or macro developments, the DVR prices would also rise (may be more or less than the normal
equity share price).
When the difference widens to a large extent, one could also do an arbitrage buy DVR and sell futures of normal shares on the
hope that the discount would narrow going forward and the arbitrage position can be closed at a profit. Timing in such a case is the only
unknown factor.

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