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Shares with Differential Voting Rights – A Strategic Tool




Shares with differential voting rights (DVR) are shares which ‘differential’ voting rights than ordinary shares.


If offers with differential voting rights allow investors to earn better return in lieu of surrendering their voting rights, it allows a company to dilute its equity without matching dilution in the promoters’ stake.


Shares with DVR comes to the management’s rescue at the time of take-over threats. DVR can be used to thwart hostile takeovers since, for all practical purposes, they decouple economic interest (dividend rights) and voting rights.


Shares with DVR are mainly targeted at passive investors. In most cases, small or retail investors, hardly exercise their voting rights or know enough to influence corporate actions. They look only for economic returns when they invest in a company and are not interested in running it or having any say in its management. So, they give away their voting rights in favour of those investors who run the company and have management control.


In a situation like that prevailing in India, where minority retail investors do not intend using their voting rights in a company, such shares allow investors to acquire shares at lower prices with prospects of higher dividends in return for surrendering their voting rights.


Companies can issue shares with lower voting rights to public shareholders. That would automatically bump up the promoters’ voting rights. Investors are compensated for lower control, so companies give them higher dividends.




Section 86 of the Companies Act permits the issue of equity shares with DVRs, subject to conditions prescribed under the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2002


The Companies Act permits a company to issue shares carrying differential voting rights when, among other conditions, the company has distributable profits and has not defaulted in filing annual accounts and returns for a minimum of three financial years preceding the year of offer. The issue of such shares cannot exceed 25 per cent of the total issued share capital of the company.


Under Rule 2 (a) ‘differential voting rights’ includes rights as to dividend or voting; and ‘financial year’ means financial year as defined under Section 2 (17) the Companies Act.



Rule 3 says that every company limited by shares may issue shares with differential rights as to dividend, voting or otherwise, if:

1.         It has distributable profits in terms of Section 205 of the Companies Act, 1956 for three financial years preceding the year in which it was decided to issue such shares.

2.         It has not defaulted in filing annual accounts and annual returns for three financial years immediately preceding the financial year in which it was decided to issue such share.

3.         It has not failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend.

4.         Its Articles of Association authorize the issue of shares with differential voting rights.

5.         It has not been convicted of any offence arising under, Securities Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, Foreign Exchange Management Act, 1999.

6.         It has not defaulted in meeting investors’ grievances.

7.         It has obtained the approval of share holders in General Meeting by passing a resolution as required under Section 94 (1) (a) read with Section 94 (2) of the Companies Act.

8.         It has obtained approval of share holders through Postal Ballot if it is a listed public company

9.         The notice of the meeting at which resolution is proposed to be passed is accompanied by an explanatory statement stating:

(a)                           the rate of voting rights which the equity share capital with differential voting right shall carry;

(b)                          the scale or in proportion to which the voting rights of such class or type of shares will vary;

(c)                           the company shall not convert its equity capital with voting rights into equity share capital with differential voting rights and the shares with differential voting rights into equity share capital with voting rights;

(d)                          the shares with differential voting rights shall not exceed 25% of the total share capital issued;

(e)                           that a member of the company holding any equity share with differential voting rights shall be entitled to bonus shares, right shares of the same class;

(f)                            the holders of the equity shares with differential voting rights shall enjoy all others rights to which the holder is entitled to excepting right to vote as indicated in (a) above.




TATA Motors DVR:

In 2008, Tata Motors became the first Indian company to make a rights issue carrying differential voting rights (DVR). Tata Motors’ DVR shares have one-tenth of the voting rights of the ordinary shares and were are being offered at a discount of Rs 35 per share. These shares are also entitled to a 5 per cent higher rate of dividend over the normal shares.


Pantaloons Bonus Issue:

Pantaloon, India’s leading retailer, is the first to issue bonus shares with a DVR option. The company made a bonus issue of 1:10 shares with differential voting rights. Although there is no fund-raising involved in a bonus issue of shares, the idea is get the markets familiar with such instruments and create another alternative to raise funds in the future.


Global angle:

While DVR is a well-accepted instrument used by blue-chip companies in international markets to raise funds, even after a decade of government’s notification, the concept is yet to become popular in India.


A clutch of foreign companies, prominent among them are Google, Ford Motors, and Berkshire Hathaway have raised funds through DVR issues.





SEBI has introduced a new rule that will effectively reduce the desire of companies to issue shares with DVR. SEBI has made a small amendment to the listing agreement that has a very wide impact. It has said that a company shall not issue shares that have either superior voting rights or higher dividend entitlements, compared to the ordinary shares listed on the exchange. The rule is effective from July 21, 2009.

The new rule prevents companies from issuing shares with higher voting rights. A situation wherein the promoter’ will want shares with lower voting rights is very unlikely. So, promoters will most likely never want to apply for DVR shares.


For example: Tata Motors issued DVR shares which had lower voting rights (one-tenth of the ordinary shares) but gave shareholders 5% more dividend. This will not be possible any longer for current DVR issues.

Companies can now compensate only by offering a higher discount to the market price. This may not work very well since Investors have not really been able to understand this aspect well, partly to do with estimating the appropriate discount. Also, price fluctuations of the ordinary shares, when the issue is open, play havoc with subscriptions. If companies can’t give higher dividends on DVR shares, investor interest will wane further.

In effect, SEBI’s move will make DVR shares unattractive to both promoters and shareholders. SEBI’s intentions must have been to prevent promoters from misusing this facility to easily get control over a company or to get higher dividends. That may be a valid concern, but could have been dealt with in a different manner.



There are only two DVRs available on the stock exchanges – one of Tata Motors and second is of Pantaloon.


A comparison of their share price movements for the last five months and Dividend Yield is as under:



Tata Motors




Ordinary Share

DVR Share


Ordinary Share

DVR Share

Share Price - 31/12/2009






Share Price - 28/05/2010






% Change












Last Dividend announced






Dividend Yield on CMP







This implies that the capital gain in either case is more or less the same. The dividend yields are much higher in absolute percentage terms. For a long term investor who wants to hold the shares for a few years and earn dividend income, the dividend yield of the shares is very crucial.


Benefits to the Investor:


Pantaloon DVR share, even today is ruling at a discount of 32%. While Tata Motors DVR is ruling at a discount of 27%.


In the case of Tata Motors, now we all know that you have 10% of the voting right plus you get 5% additional dividend whatever is declared for the ordinary shareholders. This DVR will be getting 5% more, 50 paise per share. Similar sorts of benefits are there in the case of Pantaloon.


In most AGM’s, the voting happens on a show of hands. In case of show of hands both the type of shareholders i.e., shareholders holding normal shares as well as shareholders holding DVR will be having the same rights because on show of hands it is the person which is counted as a one person one vote and not on the basis of the holding.


If the voting has happened on poll or postal ballot you will be having the representation for the DVR and one share one voting right for the ordinary shareholder.


In case of a companies like where you have the institutional presence, there is not much necessity of using the voting power by retail shareholders. In fact, the voting right is material and relevant for the institutional shareholder or large shareholders because they have the say that they can impress the management if they really feel that something is going wrong in the company. As a retail shareholder they have no say or very little say.


So for a retail investor they must use this opportunity to move from the equity shareholders to this DVR if they have the plans of remaining invested for a limited period of time.


The above point is discussed only for academic purposes. It is requested that it should not be construed as an advice to invest in any form of shares of either of the two companies discussed above.


I Hope readers would find this article to be of some value. Please help me improvise my skills by posting your views on this article.


Published by

(CS, CWA, MBA (Fin), B.Com, LL.B (Spl))
Category Corporate Law   Report

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