Differential voting shares (DVSes) are emerging as a legal and relatively cost-effective window for promoters to increase their holdings in their companies.
A trend-setting decision to this effect is Gujarat NRE Coke’s plan for a rights issue of DVSes. The board has already approved the issue and is awaiting regulatory approvals.
Each of these DVSs will carry 100 voting rights. The company has also fixed the ratio for the DVSes at 1:450, or one DVS for every 450 existing voting shares. This effectively means small investors who hold less than 450 shares are unlikely to get DVSes.
Gujarat NRE Coke, one of India’s leading producers of industrial coke, will be the first company to come out with a DVS issue after Tata Motors in September.
In Tata Motors’ case, each DVS carried a one-tenth voting right, meaning 10 DVSes are equivalent to one equity share in term of voting rights.
The Tata Motors DVS issue carried a roughly 10 per cent discount to the normal voting shares. The issue subsequently devolved on the underwriters and promoters and is scarcely traded on the secondary markets.
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Unlike Tata Motors, Gujarat NRE Coke’s DVS issue is expected to be priced around 10 times the current market price.
Experts said both the unique ratio and high pricing would ensure that normal investors are unlikely to participate in the DVS issue.
Since the company’s promoters have committed to subscribe to the entire issue if it devolves, they could end up cornering the entire DVS issue, taking their voting rights past the 50 per cent mark, said a leading investment banker on condition of anonymity.
A K Jagatramka, managing director, Gujarat NRE Coke said the DVSs would be issued at a “significant premium” to the secondary market price.
“This will help strengthen the book value of the existing shares,” he explained.
Gujarat NRE Coke has a paid-up capital of Rs 337 crore, comprising 337.1 million equity shares of Rs 10 each. Under the proposal, the company will issue 7,49,000, shares that will carry 74.9 million voting rights.
Although, the pricing of the DVS has not been decided, a highly placed source in the company said the DVS would be priced at around Rs 200 per DVS, nearly 10 times the current market price.
If the promoters subscribe to the entire DVS issue, they would have to pay around Rs 15 crore, which will increase their ownership to 52.25 per cent from the current 41.8 per cent.
Gujarat NRE Coke has a market capitalisation of around 735 crore. The promoters would have needed to fork out around Rs 75 crore has they opted to increase their stake through creeping acquisition. In this case, the annual 5 per cent limit on creeping acquisition would not have allowed them to increase their stake by 10 per cent, which they have to do to acquire over 50 per cent control.