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Differential Voting Rights Shares or DVRs

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DVR shares are Differential Voting Rights Shares.

DVR shares are listed with a stock code separate from ordinary shares.

So be careful as to which type of shares you are dealing with.

These shares are ideal for small shareholders as they rarely exercise their voting rights.

Most retail investors like us buy shares as an investment option.

We are least concerned with the voting rights that these shares have.

The best examples of DVR shares are Tata Motors, Jain Irrigation, Pantaloons, Gujarat NRE Coke, Stampede Capital etc.

The Tata Motor DVR – shares with Differential Voting Rights (DVR), have been listed on Indian bourses since 2009, when Tata Motors took over Jaguar. These shares were issued at Rs. 60 when Tata Motors was quoting at 68.

The holders of Tata Motors’ DVR shares can cast one vote for every 10 shares held. However, they are entitled to an extra 5% dividend.

The correlation between DVR and ordinary shares is high. They have always quoted at a discount to the ordinary shares.

Cheaper than normal share because they do not have all the rights. If you are an investor who attends general body meetings or cast votes, they are not good. if purely investor / trader for the sake of money and do not want to influence corporate decisions, it doesnt matter.

The price gap between ordinary shares and cheaper DVRs is a global phenomenon. However, the percentage of difference varies.

1. Companies which issue non voting shares either pay higher dividends on non-voting shares or give them a prior claim on cash flows.

2. This does complicate the comparison of prices on these shares, since the value of the higher dividends may offset some or all of the value lost from not having voting rights.

3. The shares that carry no, or fewer voting rights, should be worth less than shares that carry more voting power. The difference in price should be a function of the expected value of control.

4. The premium on voting shares should therefore be a function of the probability that there will be a change in management at that firm and the value of changing management.

5. If the primary reason for the voting share premium is the value of control, then the conclusions are as follows:

The difference between voting and non-voting shares should go to zero if there is no chance of changing management/control.

In a market where incumbent managers are entrenched, voting shares may not trade at a premium because investors assess no value to control.

A hostile acquisition in this market or a regulatory change providing protection to non-voting shareholders can increase the expected value of control for all companies and, with it, the voting share premium.

In summary, then, we would expect the voting share premium to be highest in badly managed firms where voting shares are dispersed among the public. We would expect it to be smallest in well-managed firms and in firms where the voting shares are concentrated in the hands of insiders and management.

The premium for voting shares reflects at least some of the expected value of control. The relatively large premiums in some markets suggest that the private benefits of control are large in those markets and may very well overwhelm the value of control.

After perusing the contents of the paper I have come to the following conclusions :

Academically speaking, on the basis of what is stated above, there is no justification for the DVR’s to trade at a discount of 35 percent (which is the current discount). The question of any hostile takeover or management change in the case of Tata Motors does not arise. Hence the ‘value of control’ cannot be expected to be so high.

Moreover, in the case of Tata Motors, the number of voting shares as a percentage of non-voting shares is large. In case it was the other way around, the voting shares would, justifiably, command a premium. The question of the quality of management in a Tata group company, is in my opinion, irrelevant in India.

The prime reasons for the discount in the Tata Motor DVR, in my opinion is the higher liquidity in the DVR. When the DVR’s were issued the Promoter shareholding was high at 84 per cent (in the last quarter of 2008). Now it is less than 1 %. A higher percentage of the Tata Motors DVR shares are available to the public (99.49%) and traded. This leads to higher liquidity.

1. The prices of both the DVR’s and the shares continue to increase. The discount remains the same. (Do nothing).

2. The discount increases. (Buy more of the DVR’s).

3. The price of both the instruments falls – discount remaining the same. (Just hold and forget).

4. The discount narrows. (No regrets).

For more information, read

For information on DVR, Read

The Value of Control: Implications for Control Premia, Minority Discounts and Voting Share Differentials by Aswath Damodaran, for the Stern School of Business, in June 2005

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