Corporate Governance
Proxy Voting Solutions
Vote Recommendations
DVRS
All you wanted to know about DVRs
Shares with Differential Voting Rights (DVRs) means shares that give the
holder differential rights as to voting (either more or less voting right) as
against the Ordinary shareholders of the company.
Shareholders being the owners of a company have a right to vote and
thereby participate in the Management of a company. In India where most of
the businesses are family owned, voting rights represent the only means by
which an alignment of interest between the owners (promoters) and
shareholders can be effected.
The issue of DVRs can result in two types of shares:
1) Shares that have superior voting rights.
2) Shares that have inferior voting rights but offer higher dividends or
are offered at a discount.
November 2011
Existing Regulations
Global Scenario:
InGovern
Mumbai * Bangalore
www.ingovern.com
© 2010-2012
All rights reserved
World over the concept of one share one vote is followed. However, DVRs
also called “Dual Class” shares also started gaining popularity. Globally
there are big names like Google, Ford etc. that issued DVRs. Many exchanges
like the Singapore Stock Exchange don’t allow the issue and listing of DVRs.
Many Studies conducted in USA have shown that the Agency Cost tends to
be higher in case of Dual Class of shares over the Ordinary shares.
Indian Scenario:
In India in 1991, an “Expert study on establishment of New Stock Exchange”
under chairmanship of Mr. M. J. Phewani proposed that dividend paying
companies with proper track record of dividend payment could issue shares
without right to vote. Even the Companies Bill 1993 and 1997 had mentioned
the issue of shares without voting rights subject to the terms and conditions
INGOVERN RESEARCH SERVICES
of the Central Government. Also, such issue would be restricted to 25% of the issued share
capital with voting rights. However, these Bills were not passed.
The Issue of DVRs in India was allowed only since 2001. There was an amendment made to
Companies Act 1956 through an amendment in provisions of Section 86. This Section stated
that:
The share capital of a company limited by shares shall be of two kinds only, namely:
(a) Equity share capital i.
With voting rights; or
ii.
With differential rights as to dividend, voting or otherwise in accordance with such rules and
subject to such conditions as may be prescribed .
(b) Preference share capital
To give effect to the above provisions, the Department of Company Affairs issued Companies
(Issue of Share Capital with DVRs) Rules, 2001. The condition under rule 3 of this act specifies
the preconditions that a company must fulfill to be eligible to issue DVRs.
These conditions are:
Every company limited by shares may issue shares with differential rights as to dividend,
voting or otherwise, if1. The company has distributable profits in terms of Section 205 of the Companies Act,
1956 for * three financial years preceding the year in which it was decided to issue such
shares.
2. The company has not defaulted in filing annual accounts and annual returns for three
financial years immediately preceding * the financial year in which it was decided to
issue such share.
3. The company has not failed to repay its deposits or interest thereon on due date or
redeem its debentures on due date or pay dividend.
4. The Articles of Association of the company authorizes the issue of shares with
differential voting rights.
5. The company has not been convicted of any offence arising under, Securities Exchange
Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, Foreign Exchange
Management Act, 1999.
6. The company has not defaulted in meeting investors’ grievances.
7. The company has obtained the approval of share holders in General Meeting by passing
resolution as required under the provision of sub-clause (a) of sub-section (1) of section
94 read with sub-section (2) of the said section.
8. The listed public company obtained approval of share holders through Postal Ballot.
9. The notice of the meeting at which resolution is proposed to be passed is accompanied
by an explanatory statement stating –
a. The rate of voting rights which the equity share capital with differential voting
right shall carry;
For limited circulation
©InGovern 2010-2012
INGOVERN RESEARCH SERVICES
b. The scale or in proportion to which the voting rights of such class or type of
shares will vary;
c. The company shall not convert its equity capital with voting rights into equity
share capital with differential voting rights and the shares with differential
voting rights into equity share capital with voting rights;
d. The shares with differential voting rights shall not exceed 25% of the total share
capital issued;
e. That a member of the company holding any equity share with differential voting
rights shall be entitled to bonus shares, right shares of the same class;
f. The holders of the equity shares with differential voting rights shall enjoy all
others rights to which the holder is entitled to excepting right to vote as indicated
in (a) above.
Issue of DVRs by Tata Motors
With DVRs issue allowed in India since 2000, it was almost 8 years after it that Tata Motors
became the first company to issue DVRs in India. To fund the Jaguar - Land Rover acquisition,
in November 2008, Tata Motors issued 6.4 crores DVRs (“A” Ordinary Shares) priced at Rs. 305
per share as against Rs. 340 for an ordinary share and offered higher dividend on these shares.
These shares has 1/10th voting rights. Due to lack of awareness amongst the investors
about such shares, these DVRs reported very low trading volumes.
Issue of DVRs by Pantaloons
Following Tata Motors issue, in February 2009, Pantaloons issued bonus shares which
were DVRs. These class B shares also had 1/10th voting rights to the existing ordinary
shares. These shares offered 5% additional dividend. The trading volume in these
shares was significant due to the reason that they were offered as bonus shares and not
fresh issues.
Changes made by SEBI
In 2009, Anand Pershad Jaiswal and Ors v. Jagatjit Industries Ltd. and Ors resulted in a
significant debate over DVRs. In this case, the promoters of Jagatjit Industries Ltd. had
issued with 20 voting rights per share. This resulted in an increase of voting rights to
62% for the promoters who held only 32% of economic stake in the company. The
minority shareholders Anand Jaiswal and Jagatjit Jaiswal, who together owned 12%
filled a petition with CLB. The CLB upheld the issue of DVRs as it had met all the
regulatory requirements.
Following this judgment there were a lot of voices raised on the misuse of DVRs with
superior voting rights by the management to get full control on the company to the
deterrent of the minority stakeholders. Following this, SEBI came up with letter dated
For limited circulation
©InGovern 2010-2012
INGOVERN RESEARCH SERVICES
July 21, 2009 addressed to all stock exchanges which prohibited issue of DVRs with
superior rights as to dividend or voting.
So now an issue of the likes of Tata Motors or Pantaloons with higher dividends with
lower voting rights is not possible. However, as these issues by Tata Motors were made
before the amendments, SEBI has allowed issue of DVRs as bonus shares or rights issue
to existing DVR holders of Tata Motors. The above informal guidance to Tata Motors
(issued in April 2010) also allowed it to issue fresh DVRs with same terms by FPO issue,
preferential allotment and QIPs and issue of ESOPs convertible into DVRs.
Further DVR issues
Following the SEBI amendments, Gujarat NRE Coke Ltd in Sep 2009 issued DVR bonus
shares in the ratio of one DVR bonus share for every 10 equity shares. The DVR bonus
shares had a voting right which was 1/100th of an ordinary share.
New Companies Bill 2009
The new proposed Companies Bill 2009, Clause 37 permits the issue of only two kinds
of shares Equity and Preference Share. It also states that “Equity share capital, with
reference to any company limited by shares, means that part of the issued share capital of the
company which has no limits for participation, either with respect to dividends or with respect to
capital, in distribution of profits or otherwise.”
This means that it proposes to disallow completely the issue of DVRs. However, there
were a lot of apprehensions and concerns raised over such a clause in the Bill. The
Standing Committee report on the Bill goes mentions that ”In the present market, there
may be investors who do not intend to participate in the management and operation of a
company by voting in the resolutions put forth before them, whilst at the same time being
interested in the economic benefits attaching to the shares. This provision may accordingly bring
in a certain class of investors who are only interested in the economic benefits and not in
participating in the operations and management of a company. The deletion of this flexibility
from the Bill is a cause for concern and we accordingly suggest reinstatement of this provision.”
Hence a statement is included in the Bill that “Keeping in view the large number of
suggestions received for retaining the provisions to enable companies to issue shares
with differential voting rights, the Committee would recommend that the Ministry may
re-examine their position in the matter in line with the corresponding provision in the
existing Act.”
For limited circulation
©InGovern 2010-2012
INGOVERN RESEARCH SERVICES
Advantages of issue of DVRs:
To Company:
1) A company historically would want to issue DVRs to raise more capital without
diluting its ownership structure.
2) Also, DVRs have been used as a tool to avoid a hostile takeover.
3) Sometimes shares with DVRs may be issued as a means of price discovery.
To Investors:
1) Investors benefit from a DVR issue as they are offered at a price discount.
2) Investors stand to benefit when the price differential between the Ordinary share
and DVRs reduces.
3) Also, DVRs come with higher dividend as compared to ordinary shares.
4) It is beneficial for the passive investors who are not interested in company
management and look for higher dividends and discounts.
Disadvantages of issue of DVRs:
To Company:
1) Issue of can sometimes result in a tarnished image of the company.
2) It can ward off institutional investors as they have restrictive clauses in there by
laws which prohibit investment in such instruments.
3) With lack of investor awareness about such issues, they tend to be illiquid.
To Investors:
1) Not beneficial for Institutional Investors as they are more interested in long term
capital gains.
2) Lack of transparency as to the pricing of such instruments.
3) Lack of liquidity may hamper returns.
4) Results in avoidance of takeovers that might have been in the interest of the
shareholders.
5) Makes management excessively powerful and insulate managers from
accountability, since DVRs reduces shareholders right of challenging the
management.
For limited circulation
©InGovern 2010-2012
INGOVERN RESEARCH SERVICES
Road Ahead
Instead of completely putting a ban on the issue of DVRs, the new Company Bill is now
considering making changes in the existing law while allowing DVRs issue as a means
to raise capital. We suggest the following changes:
1) While the Companies (Issue of Share Capital with DVRs) Rules, 2001 already specifies
certain pre-conditions on the issue of DVR, we believe that there is a need to review
these conditions to add more relevant and stricter qualifying norms on such issues.
2) Companies issuing DVRs need to clearly specify their intend for such an issue in
the offer document.
3) A separate committee of Directors, consisting of only Independent Directors should be
involved in fixing the terms and conditions of such issue and certify the same.
4) The pricing mechanism used for arriving at the issue price of DVRs needs to be
disclosed.
5) There is a need to ensure better investor awareness on DVRs so as to ensure liquidity in
the market.
6) The rights of the DVR holders need to be clearly defined.
For limited circulation
©InGovern 2010-2012
INGOVERN RESEARCH SERVICES
About InGovern
InGovern Research Services assists financial institutions and investors that have financial,
investment or reputational exposure to public-listed companies in India by providing our
clients with corporate governance reports and proxy voting solutions. Our clients rely on our
independent analysis and insights. Our services include:
Corporate Governance Research
Proxy Voting Solutions
Our research includes:
Proxy Voting Season Primer
AGM Calendar
Proxy Vote Recommendations
Quarterly Newsletter
For the analysis, InGovern uses its proprietary framework “Governance Radar” that has over
400 criteria drawn from Indian and international laws, regulations and guidelines and best
practices.
Disclaimer
This note is confidential and may not be reproduced in any manner without the written permission of InGovern
Research Services Pvt. Ltd. (“InGovern”). This analysis does not constitute investment advice and investors should
not rely on it for investment or other purposes. No warranty is made as to the completeness, accuracy or utility of
this analysis. InGovern does not provide consulting services to issuers. Some institutional investor affiliates of
issuers may have purchased a subscription to InGovern services, which is disclosed on relevant reports. In addition,
advisors to issuers such as law firms, accounting firms, rating agencies or others may subscribe to InGovern
services. InGovern does not discuss our analysis or reports with any entity prior to publication.
For limited circulation
©InGovern 2010-2012