A brief slide on dvr

1. Ayushi Khorana.
Ayan Das.
Dharna Dugar.
Harsh Kariwala.
Rahul Jaiswal.
Shreyta Agarwal.
DIFFERENTIAL VOTING RIGHTS.

2. INTRODUCTION
• Shares with Differential Voting Rights (DVRs) means shares that give
the holder differential rights as to voting (either more or less voting
right) as against the Ordinary shareholders of the company.
• Trading similar to Equity Shares.
• The issue of DVRs can result in two types of shares:
Shares that have superior voting rights.
Shares that have inferior voting rights but offer higher dividends or
are offered at a discount.

3. INDIAN SCENARIO
 The Issue of DVRs in India was allowed only since 2001. There was an amendment made to
Companies Act 1956 through an amendment in provisions of Section 86. This Section
stated that:
The share capital of a company limited by shares shall be of two kinds only, namely:
• Equity share capital -
– With voting rights; or
– With differential rights as to dividend, voting or otherwise in accordance with such rules and subject to
such conditions as may be prescribed .
• Preference share capital

4. CONDITIONS FOR ELIGIBILITY
To give effect to the above provisions, the Department of Company Affairs issued Companies (Issue of Share Capital with
DVRs) Rules, 2001. The condition under rule 3 of this act specifies the preconditions that a company must fulfill to be eligible
to issue DVRs. These conditions are:
Every company limited by shares may issue shares with differential rights as to dividend, voting or otherwise, if-
• The company 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.
• The company 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.
• The company has not failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or
pay dividend.
• The Articles of Association of the company authorizes the issue of shares with differential voting rights.
• The company 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.

5. • The company has not defaulted in meeting investors’ grievances.
• The company has obtained the approval of share holders in General Meeting by passing resolution as required under the
provision of sub-clause (a) of sub-section (1) of section 94 read with sub-section (2) of the said section.
• The listed public company obtained approval of share holders through Postal Ballot.
• The notice of the meeting at which resolution is proposed to be passed is accompanied by an explanatory statement stating
–
– The rate of voting rights which the equity share capital with differential voting right shall carry;
• The scale or in proportion to which the voting rights of such class or type of shares will vary;
• 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;
• The shares with differential voting rights shall not exceed 25% of the total share capital issued;
• 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;
• 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.

6. CHANGES MADE BY SEBI
• Anand Pershad Jaiswal and Ors v. Jagatjit Industries Ltd. and Ors
(2009)
• Lot of voices raised on the misuse of DVRs with superior voting
rights by the management to get full control on the company to
the deterrent of the minority stakeholders.
• SEBI prohibited issue of DVRs with superior rights as to dividend
or voting in 21 July,2009.

7. NEW COMPANIES BILL
• The new proposed Companies Bill 2009, Clause 37 permits the
issue of only two kinds of shares Equity and Preference Share.
• It proposes to disallow completely the issue of DVRs. However,
there were a lot of apprehensions and concerns raised over such
a clause in the Bill.
• Standing Committee report on the Bill says that “This provision
may accordingly bring in a certain class of investors who are only
interested in the economic benefits and not in participating in
the operations and management of a company. The deletion of
this flexibility from the Bill is a cause for concern and we
accordingly suggest reinstatement of this provision.”

8. DIFFERENCE BETWEEN DVR SHARES AND ORDINARY SHARES
DVR SHARES
• Provide few voting right to shareholders
• Rate of dividend is high
• DVR shares are ideal for small
shareholders
• Traded at a discount in comparison with
ordinary shares
ORDINARY SHARES (Equity shares)
• Higher voting right to shareholders
• Rate of dividend is low in comparison
with DVR shares
• Ideal for large shareholders
• Traded at market price

9. ADVANTAGES OF ISSUING DVR
From Issuer Perspective
• To raise more capital without
diluting its ownership structure.
• A tool to avoid hostile take over .
• To fund large Project
From Investor Perspective
• Economic Benefit as it is issued at
discount & also for incremental
dividend.
• Gain from capital appreciation in
a scenario where the price
difference between ordinary and
DVR shares falls
• Beneficial for the passive
investors

10. DISADVANTAGES OF DVR
From companies Perspective
• Lack of investor awareness about
such issues, they tend to be
illiquid.
From investor Perspective
• Possible misuse of voting power
by the promoters & hence act
against the interest of
shareholder.
• Lack of transparency as to the
pricing of such instruments.
• Lack of liquidity may hamper
return.
• Not beneficial for Institutional
Investors as they are more
interested in long term capital
gains.

11. TATA MOTORS
• In 2008, issued DVR shares.
• It was the first company in India to issue DVR shares and amongst the
very few in Asia.
• Issued at Rs 305 a share which was about 10% lower than the issue of
normal rights at Rs.340.
• Will offer 5% of more dividends.
• Gives an additional 10.3% discount.
• But carry one-tenth the voting rights of ordinary shares. This means
10 DVR shares = 1 ordinary share as far as voting rights is concerned.

12. • How did the company arrive at this price of Rs 305 versus the
normal rights shares at Rs 340?
• Why one-tenth?

13. PANTALOONS DVR ISSUE
• On July 25 2008 Pantaloon Retail India Limited (PRIL) have approved a proposal
to provide shareholders with one bonus share with different voting and dividend
rights for every 10 shares held.
• The new shares, called Class B shares, will get five per cent more dividend than
ordinary shares and will be entitled to one vote for every 10 held.
• The company issued bonus shares that were DVRs in February 2009.
• On June 14 2010 Pantaloon Retail's Differential Voting Rights (DVR) shares
closed up more than one per cent on the BSE after 26 lakh of the DVRs were
traded.
• A total of 25.9 lakh DVRs of Pantaloon were sold by the promoters to PFH
Entertainment .The shares were sold at an average price of Rs. 279.6 a DVR and
bought at Rs. 278.87a DVR.PFH Entertainment will now hold 16.3 per cent of the
DVRs. PFH Entertainment bought the DVR for a total of Rs 72.2 crore.

14. GOOGLE
• Google already had two classes of shares – A shares that have
one vote per share and B shares that have 10 votes per shares.
• The founders own the bulk of the B shares and that gives them
the ability to issue new stock without diluting their control over
the company. The new class of shares they have issued is called
the C class, and these shares won’t have any voting rights at all

15. FORD MOTOR COMPANY
• The shares available to the public are not normally identified by
a letter and have voting rights. There are 1,114,618,895 total
Ford shares outstanding.
• However, included in that number are 70.9 million class B shares
owned by the Ford officers and certain key officers. These shares
have weighted voting rights that allow them to control nearly
40% of the votes

16. THE ROAD AHEAD
1) Need to review the pre conditions (on the issue of DVR)& to add more relevant
and stricter qualifying norms on such issues.
2) Companies issuing DVRs need to clearly specify their intend for such an issue in
the offer document.
3) A separate committee of Directors, consisting of only Independent Directors
should be involved .
4) The pricing mechanism used for arriving at the issue price of DVRs needs to be
disclosed.
5) Ensure better investor awareness on DVRs.
6) The rights of the DVR holders need to be clearly defined.

17. CONCLUSION
• For an investor, who wants to be in the company’s decision
processes, DVR shares is not an attractive proposition due to
limited voting rights.
• But if an investor isn’t concerned much with voting rights, then
investing in the DVR would certainly be an attractive option.

18. REFERENCES.
• http://www.business-standard.com/
• http://thefirm.moneycontrol.com/news
• http://www.safalniveshak.com/
• http://articles.economictimes.indiatimes.com/
• http://www.thehindubusinessline.com/todays-paper/tp-
markets/pantaloon-retails-dvrs-change-hands-among-
promoters/article994305.ece

19. THANK YOU.