DVRs spurt on hopes of making it to indices

Shares with differential voting rights (DVRs) rallied sharply on Thursday a day after BSE allowed them to be part of benchmark indices. Investors bought into DVRs, which trade at a substantial discount to their main shares, in anticipation that they will make it to the main indices soon.

DVRs are similar to ordindary shares but offer higher dividend to investors in lieu of voting rights.

Companies issue DVRs to raise capital without diluting the voting rights of promoters of existing shareholders. Four companies have issued DVRs in the Indian market so far.

The DVRs of Tata Motors, the most popular among investors, rose 6.6% while those of Gujarat NRE Coke, Jain Irrigation Systems and Future Retail gained about 19, 6 and 2%, respectively.

The ordinary shares of these companies, which trade at a premium to their respective DVRs, were either down one% or up marginally. Gujarat NRE Coke is the only exception whose ordinary shares hit the upper circuit during Thursday's trading session.

"Because of the lack of visibility, these DVRs often fall under the radar of the investors. So if these DVRs are given a berth in the main indices, it would allow for increased retail participation in these instruments," said Deven Choksey, managing director of K R Choksey Securities.

Further, the price differential between the ordinary share and the DVR, which currently stands at anywhere between 45-60% could reduce over-time making them more attractive. Globally, DVRs trade at 10-15% discount to the ordinary stock of the company.

Inclusion into the main indices could push up demand for DVRs eventually reducing the price-gap, bolstering demand for the entire product segment, experts believe.

One of the criteria for inclusion into the main indices is that the DVRs outstanding of these companies should be at least ten% of the total shares outstanding of the company. At present, only the Tata Motors DVR qualifies for inclusion as the DVR shares outstanding is about 17% of the total Tata Motors shares. The DVRs outstanding of the other three are less than 10% as of now.

"Companies will look at increasing their DVR holdings to be made a part of the indices. Also, issuing DVRs is a much-more convenient way of raising capital without much stake dilution," said Rikesh Parikh, vice president (equities), Motilal Oswal Securities.

In fact, analysts believe that DVRs could soon become a regular form of fund-raising for companies, particularly those with lower promoter-holding.

Besides, DVRs of companies will be permitted into the index only if the ordinary share is already part of any of the S&P BSE Sensex, S&P BSE 100, S&P BSE 200 and S&P BSE 500 indices. Currently, except for Gujarat NRE Coke, all the other shares are part of at least one of these indices.