DVR shares' inclusion in BSE: Uncalled for!

By Geetanjali Kedia

BSE has announced new norms for inclusion of DVR (differential voting rights) shares in the indices, if ordinary shares are also part of the index and DVR shares are a minimum of 10% shares outstanding of the company. This inclusion will be in BSE Sensex, BSE 100, BSE 200 and BSE 500 indices and will be effective from upcoming rebalance in June 2015.

There are only 4 listed DVRs on BSE - Future Retail, Tata Motors, Jain Irrigation, Gujarat NRE Coke and all 4 DVRs have reacted positively today. Tata Motors DVR shares are up 6%, while Tata Motor shares are ruling soft by 1.2%, at Rs. 577. Future Retail DVR up by close to 4% at Rs. 56.70, but Future Retail share is down over 2%. Jain Irrigation DVR up 6.5% at Rs. 50.50, but Jain Irrigation share is down by 1.4% at Rs. 65.90. Gujarat NRE Coke DVR up 16.5% at Rs. 3.18, while Gujarat NRE Coke share is also locked in 19.96% UC at Rs. 5.83. While DVRs shares are also equity shares, they carry lower voting rights and higher dividend vis-à-vis ordinary equity shares.

Since Gujarat NRE Coke is a small cap company, it is not part of any of the above BSE indices. Tata Motors is part of BSE Sensex, BSE 100, BSE 200 and BSE 500, while Jain Irrigation is part of BSE 200, while Future Retail is part of BSE 500 index. Hence, first condition for ordinary shares being included is met by 3 companies – Tata Motors, Future Retail and Jain Irrigation.

Coming on to the second condition of DVRs being atleast 10% of company’s total outstanding shares,    at the time of the rebalance. As of today, only Tata Motors’ DVRs exceed 10% of the total outstanding shares, as can be seen from the table below:

 *as of 6^th February 2015, 31^st December 2014 for others.

Hence, based on the BSE announcement, only Tata Motors DVR will be included in BSE Sensex, BSE 100, BSE 200 and BSE 500 from June 2015, provided it continues to meet the above 2 conditions then.

While inclusion in the index will lead to higher holding of the DVRs among investors and subsequent research coverage, it is likely to narrow down the gap in share price and DVRs, theoretically. But practically, DVR share price can again slip down, increasing the gap, as seen from the past experiences. There are SMSes doing the rounds since morning (by one old institutional brokerage head, who was suspended by NSE for rigging price of a jewellery share) to stock up on Tata Motors DVR, ahead of this inclusion. But we advice caution!

As we find no justification for inclusion of DVR shares in the index when the ordinary shares already form a part of it. Index is for representing a company, and not the instrument. The ordinary shares are a good representative of the company.

Going by the logic of including DVR shares, even depository receipts (ADRs, GDRs) will call for a separate inclusion. Also, DVR shares in the index, in addition to the ordinary shares, will tantamount to increasing the weightage of the company in the index unnecessarily. Hence, this move on the part of BSE is uncalled for!

While there are a sentimental boost across all DVR shares in today’s trading, we expect the firecrackers to die down soon. So stay away, is all that we can say!