Interest in DVRs perks up on reports of bourses eyeing them as index components

The capital market, which hit a new high on Monday, has taken up with it the shares issued under differential voting rights (DVRs) along with it. The four DVRs — Tata Motors, Jain Irrigation, Future Retail and Gujarat NRE Coke — witnessed hectic activity with scrips of these companies gaining 5 per cent each.

A DVR is like an ordinary equity share, but it provides fewer voting rights to the shareholder. For instance, while Tata Motor equity shareholders have voting right for each share they hold, the DVR holders will have about one-tenth of the voting right but receives about 5 per cent more dividend.

Unconfirmed news in the market that bourses may consider including DVRs in the benchmark indices such as Sensex and Nifty stoked sudden trading interest in these instruments, which are otherwise largely illiquid and trade at a discount to the fully paid-up equity shares.

This also helped the DVRs narrow the discount with respect to their ordinary shares. While Tata Motors' ordinary shares gained 3.98 per cent at ₹503.9, the DVR surged 5.3 per cent at ₹349.2.

The inclusion of DVRs in the benchmark indices is expected to improve liquidity.

However, exchange officials denied any truth in the report. “There is no such move,” an exchange official on condition of anonymity said and added that investors have to be very careful and check fundamentals before investing in those stocks.

Vikram Dhawan, Director, Equentis Capital, said the inclusion of DVRs in the indices would increase DVR patronage and improve their visibility. “Some of the public and private sector companies may also consider issuing DVRs as it involves lesser dilution of ownership,” he said.

This also opens up another avenue for retail investors who have long remained passive when it comes to voting on board decisions, he said. Companies issue DVRs to prevent hostile takeovers and restrict dilution of voting rights. It also helps strategic investors who have no interest in the functioning of the company, but want to earn higher returns.

At times, companies also issue DVR shares to fund new large projects without diluting much voting rights.

According to the Companies Act, DVRs can be issued by corporates with distributable profits. Besides they should not have defaulted in filing annual accounts and returns for at least three financial years.

Moreover, DVR issue cannot exceed 25 per cent of the total issued share capital.