If you are an investor in the stock market, or even just starting out, you are bound to come across different types of shares. These could be voting shares, bonus shares, or right shares, among several others. While all together they may seem overwhelming, the two major categories that you should first learn about and understand are the Differential Voting Rights, or DVR, and ordinary shares.
In this article, we will deep dive into the definitions of these two, understand the difference between DVR and ordinary share.
Ordinary shares
An ordinary share can be described as a token issued by a company that represents ownership. Now, why would a company issue shares? A company issues ordinary shares to raise capital for its business. Simply put, if you own a company’s shares, you are part owner of the enterprise. As an equity shareholder of the company, you have a right to determine the company’s policy. Typically, one equity share grants one vote. Moreover, equity shares also entitle the holders to dividends, and rewards for the capital input.
DVR shares
Now let us understand what Differential Voting Rights (DVR) shares are, before getting into the difference between DVR and ordinary share. Focus on the first word, ‘differential’ to understand how these shares are different from the ordinary. In the clearest terms, DVR shares have less or more voting rights than ordinary shares.
What attracts investors towards DVR shares is that the lack of voting rights is accompanied by higher than ordinary dividend payouts. Thus, these shares are preferred by investors who do not intend to participate in the voting and company policy making. While on the company’s end, DVR shares are a great way to raise equity capital without diluting the company’s ownership.
A brief history of DVR shares in India
Until the early 2000s in India, owning a share of a company always ensured the right to vote. This was a time before the existence of DVRs. For the first time, in 2001, companies were permitted to issue DVR shares. This was brought about with the Companies (Amendment) Act, 2000. Post this, the first Indian company issued DVR shares in 2008.
DVR regulations
At present, companies in India are not permitted to issue shares that have multiple voting rights. This means that the voting rights carried by DVR shares must necessarily be lower than ordinary shares. The Company’s Act 2013 outlines several conditions for an entity pertaining to the issuance of DVR shares. These include
- The business must have reported profits in at least three years prior to the date of issuance of DVR shares.
- Without any discrepancies, the company must have filed annual accounts and returns for these years.
- The value of the DVR shares issued must not exceed 25% of the said company’s shared capital.
Similarities and differences between DVR and ordinary share
While DVR and ordinary share may have their differences, both of them have several similar functions. One major similarity is that both DVR and ordinary share have similar rights when it comes to issuing bonus shares and issuing rights.
DVR vs ordinary share
| Sr. no. | DVR shares | Ordinary shares |
| 1 | Low voting power | Higher voting rightsTypically one share = one vote |
| 2 | Compensating for the lower voting power, DVR shares carry higher dividends. In addition, DVR shareholders are paid a premium over and above the dividend. | Comparatively lower dividends. Ordinary shares also empower the holder to vote and be involved in important company decisions and policies. |
| 3 | Sold at a discount | Sold at a higher cost |
Advantages of DVR shares
Whether it be the company or the investor, DVR and ordinary shares both hold their own specific value and utility. Specifically, DVR shares can be beneficial to both parties. Let us take a closer look into the benefits of DVR vs ordinary share-
- Decision-making dilemmas- If you are an investor who does not want to engage in a company’s decision-making process, then the choice for you between DVR vs ordinary share is clear. DVR shareholders do not have an active role in a company’s strategic decision or policy making. This may be a perfect avenue for you if you are a small investor or if you do not want an active role in the daily functioning of the company.
- Affordability- Continuing from the first advantage, when it comes to DVR vs ordinary shares, owing to the lack of voting rights, DVR shares are priced lower and are sold at discounts. Thus, for the same amount of money invested, you can acquire a higher number of shares, significantly increasing the earning potential.
- Higher Return on Investment (ROI)- A smart investor knows that DVR shares can fetch greater returns. This is because of two reasons. Firstly, DVR shares would entitle a shareholder to a higher dividend, as you are giving up voting rights. But, over and above the higher dividend, DVR shareholders also receive a premium. Both of these, combined with the fact that DVR shares are bought at a lower price, present a higher ROI avenue compared to ordinary shares.
In conclusion
If you are an investor or want to be an investor, an understanding of the difference between Differential Voting Rights shares or DVR and ordinary shares is a must. While ordinary shares come with traditional ownership and voting rights, DVR shares present a higher ROI prospect. In the Indian market, DVR shares have enabled companies to raise equity capital without relinquishing control. Small and passive investors may find DVR shares appealing owing to the higher earning potential, discounts, and potential for higher returns. By understanding the difference between DVR and ordinary share, you can make a well-informed decision to suit your needs.
