High price discount compared to ordinary shares and dividend rate make differential voting rights shares attractive.
Investing in DVR (differential voting rights) shares can be a good option for generating higher returns, given the huge discounts they are trading at as well as the higher dividend.
DVR shares are gaining popularity as the number of companies issuing or planning to issue these is gradually rising. While the country’s leading automobile company, Tata Motors, was the first to offer DVR shares, Gujarat NRE Coke and Pantaloon Retail have also raised funds through this route. Recently, Tata Steel announced a plan to raise Rs 7,000 crore through various instruments. This is likely to include a DVR share issue worth $1 billion.
| UNDERSTANDING DVRs |
| What are DVR shares? DVR shares are like ordinary equity shares but with differential voting rights. They are listed and traded in the same manner as ordinary equity shares. However , they mostly trade at a discount as they provide fewer voting rights compared to ordinary equity shares. Companies generally compensate DVR investors with a higher dividend. Why they are issued Companies issue DVRs for reasons such as prevention of a hostile takeover and dilution of voting rights. However, this also helps strategic investors who do not want control but are looking at a reasonably big investment in a company. At times companies issue DVR shares to fund new large projects, as due to the fewer voting rights, even a big issue does not trigger an open offer. |
DVRs mostly trade at a discount, largely due to the fewer voting rights they enjoy. However, at times, the gap between DVR and ordinary shares is big, providing good opportunity to investors.
For instance, Tata Motors’ DVR shares are trading at a huge 33.5 per cent, or Rs 410 per share, discount to the ordinary shares, which are at Rs 1,230. While voting rights are less, the additional five per cent dividend for DVR shares translates into a dividend yield of 2.3 per cent (based on last year’s dividends), which is almost 110 basis points higher than the company’s ordinary shares. While this difference makes the yield attractive, the reasons for the difference are many.
| HOW THEY STACK UP | |||||
| CMP (Rs) | DVR price (Rs) | Discount (%) | Voting rights | Extra div. | |
| Tata Motors | 1,231 | 819 | 33.5 | 10-Jan | 5% |
| Pantaloon Retail | 437 | 372 | 14.9 | 10-Jan | 5% |
| Guj NRE Coke | 55 | 38 | 31.4 | 1/100 | NIL |
“Price differentials have many reasons, including lack of awareness, hesitation by investors and lower liquidity in the counter. But, if you have faith in the company or the group and at the same time there is enough discount to the ordinary shares, it could be a rewarding instrument,” says Prashant Shetty, managing director, IDFC Capital. The additional gains could come from a reduction in the price difference between ordinary and DVR shares. “Internationally, DVRs trade at a discount at about 10-12 per cent, but in India the discount is large, which could only shrink over a period as a result of rising awareness about the product,” says SP Tulsian of sptulsian.com. While investor comfort is also cited as a reason for this discount, experts see an opportunity. Also, this is why experts believe a lot of institutional investors participated heavily in Tata Motors’ DVR issue as against retail investors, who are not much aware about the product and its trading pattern.
Factors to consider
There is no perfect formula to arrive at the right price. “However, apart from the fundamentals, which we look at in any equity investment, factors like discount vis-à-vis ordinary shares, dividend yield, size of the equity capital and ratio of voting rights play a role in determining the effective price of DVRs,” says B Madhuprasad vice-chairman, Keynote Corporate Services.
Another important factor, says Ashok Kumar, director, Lotus Knowlwealth, is that “a large discount is the result of low liquidity in many of these cases, which if improves can reduce the pricing differential”.The only caveat is that before investing in a DVR, investors need comfort about the company’s fundamentals and prospects, and more importantly, its management. Unless you are not confident on these counts, giving up voting rights for a lower price may not give the desired returns. Among DVR shares available presently, those of Tata Motors and Gujarat NRE are trading at a huge discount, while Pantaloon Retail’s DVRs are available at a discount of just about 15 per cent. Most experts believe if investors are comfortable investing in any of these companies, the DVR route is a better option.“Considering the quality of the management, business fundamentals, and predictability of dividends, Tata Motors' DVR looks very lucrative from the long-term perspective,” says Tulsian. While the price difference in case of Pantaloon’s DVRs is far less, like Tata Motors, its DVR holders will earn a five per cent higher dividend. The long-term bullish outlook for retail and a higher dividend should deliver better returns.