Twelve years after they were introduced, differential voting rights, or DVRs (which are cheaper than ordinary shares and offer higher dividends but fewer voting rights),appear to be gaining momentum, write Nitin Shrivastava and Sachin P Mampatta
Although the government allowed companies to raise capital through differential voting rights (DVR) shares way back in 2000, it took nearly nine years for the concept to translate into reality. Tata Motors was the first company to issue DVR shares in 2008. Since then, only three more Indian companies — Pantaloon Retail, Jain Irrigation and Gujarat NRE Coke — have tapped this route.
Sure, just four DVR issues in 12 years do not seem like a big deal. But all this might change quickly as brokerages are pitching DVR shares aggressively to retail investors, highlighting both huge trading discount to ordinary equity shares and higher dividend yields that characterise them.
DVR shares are similar to ordinary equity shares except that they provide differential (read fewer) voting rights to investors. Hence, they trade at a discount to ordinary shares. To compensate, companies offer DVR investors slightly higher dividends. These days, DVR shares offer one-tenth to one-hundredth of voting rights and trade at 40-60% discount.
Non-institutional holding in DVR shares has been rising over the last few quarters. Latest corporate results suggest that the uptrend has continued in the December quarter. For instance, shareholding of non-institutional investors in Tata Motors’s DVR stock stood at less than 3% in March 2009. But, over the last three quarters, it has increased substantially, from 10.54% in March 2011 to 16.02% in December 2011. (An aside: the domestic institutional investors like mutual funds and insurance companies, too, have increased their collective stake in Tata Motors from 30.44% to 46.61% since March 2011.)
Similarly, non-institutional holding in DVR shares of Pantaloon Retail has risen from 30.73% in March 2011 to 36.12% in September 2011. In Gujarat NRE Coke, it has swollen from 37.45% to 39.82% in the same period.
Experts believe both deep trading discounts and high dividends are making retail investors flock to DVR shares. The price differential between ordinary shares and DVR shares is dependent on a number of factors. For one, how the company is perceived matters. For another, the floating stock available has a bearing.
That is not all. In India, institutional investors are generally not comfortable with the idea of holding stakes without voting rights. Which is why they have been steering clear of DVR shares all these years. Such factors have caused DVRs to trade at a heavy discount in the Indian markets.
“For passive investors who do not wish to exercise their voting rights, DVR shares present an opportunity to buy into a company at a discount,” says Dhiraj Sachdev, fund manager at HSBC Global Asset Management.
Of late, brokerages, citing historical trends and dangling the prospect of huge discounts narrowing further in future, have been pitching DVR shares to retail investors. (The discount in recent times had widened to 40-60% from historic levels of about 30-40%.)
But experts think investors should look beyond the discount and consider factors like the quality of a company’s management and future prospects. Chokkalingam G, executive director and chief investment officer at FCH Centrum Wealth Managers, says that while DVR shares may lack the power to influence the direction a company takes, their price movements in reaction to news would nevertheless mirror ordinary shares’. “These securities are often issued if companies need to raise capital but are afraid of diluting their voting rights. These securities should move in line with the regular shares.”
Some experts say investors should not buy DVR shares merely because they are cheaper than normal shares. For, their performance lags returns on ordinary shares due to factors like low institutional interest and lack of liquidity. Historically, they add, DVR shares have not given superior returns compared to ordinary shares. “When the market does go up, they do not provide better performance. The higher dividend yield in no way compensates the loss of returns. The recent hype about DVR shares generated by brokerages should not be taken at face value,” says V K Sharma, head of private broking and wealth management at HDFC Securities.
Sharma may well be true because, except Tata Motors’s DVR shares which offered 59.61% capital gains since December 30, 2011 (as compared to 53.53% returns on ordinary shares), the other three DVR stocks have not been as profitable. In fact, they have seen their discount to ordinary shares widening.
For instance, the DVR shares of Gujarat NRE Coke have appreciated by just 27.20% this year. In sharp contrast, the price of its ordinary shares has ballooned as much as 63.35%. Similarly, returns on DVR shares of Pantaloon Retail and Jain Irrigation have been 45.39% and 25.39% as against ordinary shares’ returns of 52.26% and 35.31%, respectively.
So, experts caution, investors may be better off looking at liquidity and fundamentals of a company first before going in for the seemingly attractive discounts that DVR shares offer.
Comments