Difference Between DVR and Ordinary Share

Are you interested in investing in the dynamic Indian stock markets but worried about the risks involved? Well, have you heard about differential voting rights (DVR) shares? These equities offer a higher potential for generating dividends but at the cost of voting authority. Despite their numerous upsides, Indian investors seem hesitant to embrace DVR stocks. So, what’s the reason behind this dichotomy? 

In this article, we will learn the workings, advantages, disadvantages, and real-world case studies of DVR shares. 

Read on to learn:

– What exactly are DVR shares, and how do they function

– How DVR stocks differ from ordinary shares

– The reasons behind the allure of DVR equities for investors 

– Why the Indian investor community continues shying away from these stocks

– Whether DVR shares deserve a spot in your portfolio

Decoding Differential Voting Rights Stocks

Differential voting rights (DVR) shares are a type of stocks that give investors a unique advantage. Unlike regular stocks, owning DVR shares allows investors to have a greater say in the decision-making of the company they have invested in. This means that they can have a larger voice in important company matters, even if they don’t own as much stock as others. 

This separation of voting power from shareholding can happen in two different ways according to the law.

1. Investors can gain higher voting rights despite owning fewer shares in a company. This structure concentrates voting power among loyal investors having long-term strategic interests in the company. 

1. Investors can sacrifice voting rights in exchange for higher dividend payouts arising from their shareholding. This attracts profit-motivated investors who prefer to avoid assuming voting responsibilities.

In India, companies can issue DVR stocks that give owners both ownership and voting power. This means that people who own DVR stock can vote on how the company is run and receive higher dividends.

Difference Between Contrasting DVR Shares and Ordinary Shares

Ordinary shares are a type of stock that gives equal rights to all shareholders. These shareholders can vote on important company decisions based on the percentage of shares they own. They can also help choose the board of directors and influence dividend policies.

But there’s another type of share called DVR shares that gives more voting power to certain investors. For example, if a company wants to give more power to its leaders, it can issue DVR shares that concentrate more voting power among them.

Conversely, consider profit-oriented shareholders being issued DVR shares. In sacrificing voting rights, they gain higher dividend payouts arising from their ownership stake. Typically, the dividend earnings advantage ranges from 10-20% over ordinary shareholders.

When a company decides to issue Differential Voting Rights (DVRs) shares, it appeals to two types of shareholders. One type is the strategic leaders who want to maintain control of the company. The other type is passive investors who are looking for high dividend returns.

What Drives Investor Interest in DVR Stocks? 

DVR stocks can help you make money while reducing risks in a volatile economy. Let’s explore why people are interested in buying them and what benefits they offer to shareholders:

1. Wealth Multiplication Potential

DVR stocks offer higher dividends because they have lower voting rights and are sold at discounted prices. Investors who buy more shares for less money, which means they own a higher percentage of the company and can earn 10-20% more in dividends than regular shareholders.

2. Value Unlocking at Lower Capital Commitment

Investors can invest in profitable stocks without spending a lot upfront. By investing in DVR issues, which are priced at a discount of 20-25%, investors can increase the amount of high-performing stocks in their portfolio.

3. Zero Voting Responsibilities

Investing in DVR shares can be great for those who only care about making a profit. By sacrificing voting rights, investors can focus solely on earning dividends, increasing the value of their stocks, or selling them at the right time. This makes managing investments easier and frees investors from company stewardship obligations.

Why the Reluctance Among Investors?

Despite noteworthy advantages, average Indian investors continue displaying inertia towards purchasing differential voting rights shares. Even profitable, blue-chip companies like Tata Motors, PNB, or Jindal Steel have struggled to popularise DVR issues. 

Have you ever wondered why some stocks related to digital video recording (DVR) are doing better than others? To understand this, we need to look at the other side of the coin and examine the factors that influence the performance of these stocks.

Trade-Off Disconnect with Investor Interests

When a company issues two types of shares, it can create a problem for the minority shareholders. This happened with Tata Motors in 2008 when one type of share had much less voting power but slightly higher dividends. This meant that regular shareholders had less say in important decisions but only got a small increase in their payments.

Naturally, shareholders questioned if higher dividend earnings could ever offset this disproportionate loss of authority over strategic decisions. This disconnect with investor interests has clouded DVR issues in India.

Dilution of Shareholder Value in Future Capital Raisings

Investors around the world worry about losing their ownership in a company when the company issues new shares. This fear is even greater when it comes to shares that have fractional voting rights but higher earnings entitlements. 

Small investors are understandably concerned that the value of their shares might decrease significantly when the company issues new shares in the future. Therefore, it is important to improve the confidence of investors in these shares so that they can be more confident in their potential for financial gains.

Absence of Trading Platforms and Benchmark Indices 

In India, investors wanting exposure to differential voting rights shares face tangible difficulties. Issues like Tata Motors DVR are seldom available on leading stock exchanges for active trading. Often, their markets need to be more obscure and illiquid.

Moreover, the absence of DVR share price benchmarks akin to Sensex or Nifty indices keeps investors guessing on fair valuations. Such infrastructure limitations corrupt the appeal of DVR stocks.

Should You Buy into DVR Stocks?

Considering the advantages and disadvantages, shares with differential voting rights can provide a reasonable investment opportunity for certain Indian investors. However, it should be noted that this investment option comes with some conditions.

1. For Profit-Focused Investors

Investors prioritising regular earnings and portfolio growth over strategic control can immensely gain through DVR stocks. Access to blue-chip stocks at fractional costs, zero voting hassles, and higher proportional dividends offer a compelling case towards allocating 5-10% portfolio exposure here.

2. For Long-Term Investors

Long-term investors capable of stomaching interim volatility can utilise the discounted pricing of DVR issues to gain commanding stakes in high-quality stocks. With a 5+ year horizon, concerns like inferior liquidity or shareholder value dilution hold lower relevance.

Conclusion

Investors aspiring to portfolio diversification may consider shares with differential voting rights, although these may not be suitable for low-risk investors. If India allows the issuance of shares with superior voting rights, investing in these shares will become more attractive. Until then, a balanced approach is best for building equity exposure.

Frequently Asked Questions

What are differential voting rights (DVR) shares, and how do they differ from ordinary shares?

DVR shares allow separation of ownership and voting rights; investors gain higher dividends by sacrificing voting power or getting disproportionate voting rights over a company.

What major benefits do investors get from investing in companies' DVR stocks?

Key investor benefits are discounted purchase costs enabling higher proportional ownership, over 10-20% extra dividend earnings, and no voting-related responsibilities.

Why are many Indian investors still reluctant to purchase available DVR stocks despite their advantages?

Investors fear skewed trade-offs in dividends versus voting rights, risks of future stake value dilution, lack of DVR stock platforms, and absence of price benchmark indices.

For which investor profiles can investments in DVR shares prove valuable in India?

Profit-focused investors wanting regular earnings and long-term investors who can stomach interim volatility can gain from smart DVR stock purchases.

Should low-risk investors allocate portions of their equity portfolio to available DVR shares?

No, concerns like fractional ownership complexities and infrastructure constraints cap the appeal of DVR shares for low-risk investors currently.