Differential voting rights (DVR) shares were introduced to Indian investors in 2000. But what exactly is the meaning of DVR shares? Simply put, investors with DVR shares have higher or lower voting rights than equity shareholders. Under the Indian legal ecosystem, businesses are not permitted to issue equity shares with the privilege of superior voting rights. Only DVR shares issued in the capital market come with these limited voting rights.
In this article, we will explore DVR shares in detail and what makes them different from regular shares.
Everything you need to know about DVR shares
By now, we know that DVR stands for differential voting rights. Let us now understand what makes them unique. DVR shares offer higher dividends or additional fiscal advantages in exchange for reduced or no voting privileges.
As an alternative financial instrument, they enable organisations to raise capital to finance their ongoing or new endeavours without watering down control. By rendering limited or no voting rights, these shares are typically targeted at investors who are focused on income or profit-based investments and do not mind being excluded from participating in key corporate decisions.
How are DVR shares different from ordinary shares
There are three ways in which DVR shares are different from ordinary shares.
- Compared to ordinary shares, DVR shares provide lower voting rights. Therefore, the shareholder might not have the right to vote, but gets access to other privileges like bonus shares and rights shares issue.
- DVR shares are typically rendered at a discounted rate, which implies that the investment amount can be substantially lower than the investment in ordinary stock.
- Since DVR shareholders have limited voting rights, they get higher dividend payouts than owners of ordinary shares.
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Why do businesses issue DVR shares
In the current economic climate, companies often need capital to grow. Typically, entrepreneurs approach potential stakeholders to offer investment opportunities in their business. However, this also implies that entrepreneurs must loosen their grip and give up some control over their business. DVR shares enable organisations to secure their interest while they collect the additional capital needed to keep the business operations flowing. They can be an economical solution to raise capital rather than debt financing if the company specifically does not wish to amplify its leverage.
Issuing DVR shares is a great way to land a diverse base of investors who are seeking investment opportunities but do not want to partake in the day-to-day workings of a company. The business also controls how many voting rights they wish to assign. By distributing DVR shares, the company can protect itself from any hostile takeovers or radical structural shifts in the company. When there are diminished or no voting rights, shareholders cannot make up a majority to take over company control.
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Why should you invest in DVR shares?
- Discounted price: DVR shares issued in the capital market are often offered at lower prices, meaning you do not have to invest a substantial amount of money to purchase them.
- Strategic investment: If you do not want to be involved in the day-to-day operations of a company and still reap the benefits of a lucrative business, DVR shares are a perfect investment opportunity for you. Simply put, you get to enjoy the rewards with limited participation.
- Greater dividends: Compared to ordinary shares, DVR shares offer higher returns. These could be as high as 10% to 20%. And because such stock is issued at a discounted price, the dividend yields are relatively lucrative.
- Distribution of risk: You can diversify your risk levels by buying DVR shares with your ordinary stock. In this manner, you rebalance your portfolio with potential returns alongside voting power.
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What are the limitations of DVR shares?
- Limited or no voting rights: The main drawback of DVR shares is the diminished voting rights or the absence of them. This restricts the shareholders’ influence over key organisational decisions, making them less attractive to investors who want to participate actively in decision-making and have a say in a company's day-to-day workings.
- Negative market opinion: DVR shares might be viewed in a negative light by investors who opine that diminished voting rights signal a lack of faith in shareholders, which could affect an organisation’s reputation.
- Uncertainty with dividends: While DVR shares may offer higher dividends than regular shares, they are most certainly not guaranteed as there might be alterations in the dividend policies. This could unfavourably impact the income stream of DVR stockholders.
- Liquidity issues: Compared to regular equity shares, DVR stocks have lower liquidity, which makes it trickier to sell promptly at market prices. This could be a disadvantage for investors who seek flexibility in buying and selling.
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Closing thoughts
DVR shares can be a great investment opportunity for potential shareholders to invest in a company with limited capital. Additionally, there is a chance of landing lucrative dividends on DVR shares compared to ordinary shares. However, such stocks are not ideal for investors who are not ready to forgo voting rights and want to actively participate in the company’s key decisions. Moreover, DVR shares do not always guarantee higher dividends, and investors may not be able to sell them quickly due to low liquidity. Therefore, if you are planning to buy DVR shares, ensure you properly research the company, its financials, dividend history, and future plans to avoid any curveballs at a later date.
