Intoduction

In the dynamic landscape of corporate governance, companies seeking to balance control and investor protections are increasingly turning to Differential Voting Rights (DVR) as a strategic tool.

By grating varying voting powers to different classes of shares, DVR empowers founders, key stakeholders, and strategic partners to retain significant control over their enterprises while opening doors to external investments and public listings.

In this article, we will understand what are DVRs and why they are getting all the limelight.

Read on!

What are Differential Voting Rights?

Differential Voting Rights or DVR grants different voting powers to different classes of shares within the company. In a typical company, each share represents one vote, giving all shareholders equal voting rights. However, case of DVR certain shareholders are given more voting powers than others.

Reasons, why companies opt for DVR, are:

1. Founder’s Control: To allow the company’s founder or key stakeholders to retain higher voting power and control over the company even as they sell or dilute their ownership through public offerings or raising capital.
   
2. Investor Protection: To attract external investment without ceding control to new shareholders, especially in cases where founders want to retain a significant say in company decisions.
   
3. Strategic Alliance: In the case of joint ventures or strategic partnerships, DVR can be used to give a specific partner more influence over decision-making.
   
4. Public Listings: Companies might use DVR to go public while ensuring that the founders or major investor retains significant control.

In India, Tata Motors issued the first DVR shares in 2008, according to experts. However, it has announced the conversion of its DVR shares to ordinary shares.

Advantages of DVR Shares in India

Various features that DVR provides are as follows:

1. Retaining Control: DVR shares enable the company’s founders and promoters to raise capital while maintaining control over the decision-making process, even with a smaller ownership stake.
   
2. Attracting Investments: DVR shares provide a way for companies to raise capital from external investors while ensuring that founders and promoters maintain control. This can be especially appealing to investors who want to invest in promising ventures but are comfortable with the existing leadership.
   
3. Preventing Hostile Takeovers: The higher voting power of DVR shares can act as a deterrent against hostile takeovers, as it requires a potential acquirer to acquire a significant number of DVR shares to gain control.
   
4. Encouraging Entrepreneurship: By assuring founders of continued control, DVR shares can encourage entrepreneurship and innovation, as founders are less likely to be concerned about losing control over their companies.
   
5. Fundraising Flexibility: Issuing DVR shares provides companies with an alternative method of raising funds without diluting voting power significantly, making it an attractive option for capital raising.

Disadvantages of DVR

Apart from the disadvantages, DVR has some shortcomings as well:

1. Reduced Voting Rights: DVR shareholders have less influence over the company’s decisions compared to regular equity shareholders, which may be a concern for some investors.
   
2. Limited Dividend Benefits: While DVR shareholders may enjoy the same dividend rights as regular shareholders, they may miss out on potential bonuses or special dividends.
   
3. Volatility and Liquidity: DVR shares may exhibit higher volatility in the market due to their lower liquidity and investor preference for regular equity shares.

Conclusion

Differential Voting Rights (DVR) shares have emerged as a compelling governance tool that seeks to strike a delicate balance between founder control and external investments in today’s corporate landscape. However, they come with inherent challenges that demand careful consideration.

It’s important for investors to carefully consider their investment objectives, risk appetite, and voting preferences before investing in DVR shares. Companies issuing DVR shares must comply with the regulations and guidelines set by SEBI (Securities and Exchange Board of India) to protect the interests of investors and ensure transparency in the issuance and trading of these shares.