Markets regulator to take a leaf out of US dual-class structures

While there is a need for dual-class shares in India, previous issuances are languishing

The Securities and Exchange Board of India (Sebi) is studying the success of dual-class share structures in the US before similar instruments can be rolled out in India, said people with the direct knowledge of the development.

The markets regulator has set up an expert group, which is looking at whether structures such as differential voting rights (DVRs) can take off in India the way they have in the US. 

The move follows a representation from market participants highlighting the need for such instruments. The demand comes at a time when domestic start-ups are gaining prominence in the eco-system.

Globally, dual-class share structures that allow an issuer to raise equity capital without diluting control are common. Some of prominent companies where such shares are issued in the US are Alphabet, Facebook and Snap.

Currently, Sebi doesn’t allow issuance of shares with differential voting rights. Under the earlier regime, companies such as Tata Motors issued DVRs. However, these shares have failed to cheer investors despite higher dividends on offer. 

People in the know said the Sebi panel met recently to discuss aspects that have worked in making DVRs a relatively successful instrument in the US and how the DVR market can be developed in India. 

Market players say lack of liquidity and the widening discount between DVR and ordinary shares have projected these instruments in poor light. 

According to data from Bloomberg, the average one-year volumes of regular Tata Motors shares are four times that of its DVRs. 

In case of Jain Irrigation, the regular shares’ average one-year volume is 55 times higher. Further, Tata Motors’ DVR shares currently trade 45 per cent below the regular shares. 

The DVR of Jain Irrigation trades 32 per cent lower than its regular shares. Globally, the discount between ordinary shares and DVRs are in the range of 1-10 per cent.

Currently, the discount between the so-called class-A shares (with voting rights) of Alphabet and its Class-C shares (DVR) is just 1.4 per cent.  

“The poor performance of current DVRs in India can’t be used to write-off the potential of this instrument. India has not seen any meaningful DVR issuances. The main draw for this product is higher dividend in lieu of forgoing voting rights. However, firms that have issued DVRs domestically have been unable to incentivise investors through adequate dividend,” said an investment banker.

Market players say the re-introduction of DVRs in India will help start-ups as well as manufacturing companies, where typically promoter stake is low and debt levels are high.

Some of these companies include Tata Steel and Tata Power.

“Dual class shares are globally quite popular, especially among start-ups that need to raise funds and retain control at the same time. As can be seen from the deep discount at which DVRs are trading, domestic investors are not familiar with the concept. The capital-raising needs of home-grown start-ups, and companies with lower promoter stake, also have to be met for overall development of the market,” said Mahavir Lunawat, managing director of Pantomath Capital.

Also, if executed well, DVRs can help channelise more retail investments in the market, say experts.

Individual shareholders in any case don’t hold enough shares to influence a firm’s board proposals. So, a higher-dividend paying share can be of interest to these investors,” said another fund manager.