Everything you must know about DVR shares

‘One share, one vote’ had been the bed-rock principle of the financial world for years, until the year 2000, when DVR shares were introduced in India for the first time. But what is DVR share? DVR stands for stocks that have Differential Voting Rights. Meaning that the shareholders with DVR shares have higher or lower voting rights as compared to shareholders who have equity shares. But under the Indian law, companies are not allowed to issue equity shares with superior voting rights, so the only DVR shares issued in the Stock Market are those with limited voting rights.

How is a DVR share different from an ordinary share?

DVR shares are different from ordinary shares in two prominent ways.

1)    They offer lower voting rights as compared to ordinary shares. So, the shareholder might not have the right to vote, but other rights such as bonus shares, rights share issue, etc. remain intact

2)    DVR shares are generally offered at a discount which means the investment amount can be significantly lower as compared to investing in ordinary shares

3)    Shareholders with DVR shares get higher dividends as compared to ordinary shares to compensate for the sacrifice of their vote

Why do companies issue DVR shares?

To grow and expand in today’s world, companies need capital. Often, the founders and main stakeholders have to reach out to potential shareholders who would be willing to invest in the company. But this also means diluting the power and giving away some of the control. DVR shares help companies protect their interest while enabling them to raise that additional capital required to keep the business going.

So, issuing DVR shares is a brilliant solution in getting investors who are looking for investments but don’t want to participate in the workings of the business. The company can also control how many voting rights they want to give away. DVR shares also provide a safeguard against hostile takeovers. Without voting rights, shareholders can’t gain majority and challenge to take-over the control of the company.

Why should you invest in DVR shares?

1)    Strategic Investment – DVR shares provide you with an opportunity to reap the benefits of a highly successful business venture without having to worry about the day to day affairs of the company

2)    Discounted rates – DVR shares are listed on the stock market at lower costs which means your investment budget is smaller too

3)    Better dividends – DVR shares offer higher returns as compared to ordinary shares. As high as 10 – 20 percent. And since these shares are quoted at discounted rates, the dividend yields are much more profitable

Conclusion:

While DVR shares might not have taken off in India in a big way, the latest amendment by SEBI may go a long way in enhancing the attractiveness of DVR shares in the Indian Stock Market. According to this amendment, SEBI has approved a framework that allows individual companies to issue shares with superior voting rights and disallows further issuance of shares that have lower voting rights. Moreover, the government has also relaxed the norms for start-ups, where they can now have up to 74 percent DVR shares of the total capital as compared to the previous 26 percent. This move will enable companies to retain control while raising equity capital. How it impacts the world of the stock market is yet to be determined.