DVRs – NO ONE IS GIVING THIS CATEGORY THE GOLDEN GLOBE!!

By Ruma Dubey

With so many issues flooding the primary market, and so many new stocks getting listed, you cannot help but wonder and look at another category which has not got a new listing since 2011.

We are talking about the other category of shares – Differential Voting Rights (DVRs).  As is it supposed to, DVRs always quote at a discount to the equity share price. But in the case of Future Enterprise DVR and equity, both are at quoted at almost the same price! And that’s a rarity. The gap between DVR and equity share price of Tata Motors and Jain Irrigation continues to remain in the 40-30% range.

DVRs are not bonds, they are like any other equity share but as the name suggests, carries differential voting rights – this means they actually have fewer voting rights – one tenth, than equity shares but these lower voting rights are compensated usually with a much higher dividend payout.  The good part about DVRs is that because investors are ready to relinquish some of their voting rights, they get the shares at much discounted rates but higher dividends. This is a great instrument for small retail investors who are not really seeking any voting rights in the company but are rather looking at higher returns via dividends – usually it is a dividend 5% higher than ordinary shares dividend.

But in the case of Tata Motors, dividends on DVRs have not been higher and in October, it was excluded from the Nifty. This had spread the discount to over 45%. There was also news of Jhunjhunwala selling his DVRs in the company. Does this mean that people are losing whatever little interest there was in DVRs?

At least, going by two stocks currently, that’s how it seems. SEBI had stated clearly in 2009 that it prohibited listed companies from issuing shares with superior rights as to voting or dividend over equity shares that are already listed. So the lure of higher dividend also got ruled out. Thus what a DVR holder now basically signs up for are shares with lower voting rights but has complete faith in the long term prospects of the company. The higher dividend, which was a compensation for sacrificing the voting right is also not there anymore.

Thus why would we buy a DVR when we can get the shares, albeit at a higher price but with the assurance of a better dividend and power to vote if anything is going wrong in the company? Also with Nifty excluding Tata Motors DVR, the writing on the wall is that maybe one day, BSE might do the same.  Thus at this point of time, no one is truly giving a thumbs up to DVRs. But if investing in DVRs is a compulsion then - DVRs are very good tools of investment for those not seeking any voting rights. This works best when the company’s management is trust worthy or else relinquishing voting rights and allowing the promoters a free run might prove detrimental. Best strategy – invest in the DVRs when the gap between the ordinary share price and DVR price is larger, as one will gain from capital appreciation as gap closes. Once the gap narrows, one can sell the DVRs and invest in the ordinary shares – getting best of both the worlds!    But seriously, do you want to do this churn when clearly equity shares remain the best option?