NISM Professor

Differential Voting Rights

Also written DVR · Differential Voting Rights (DVR) · DVR shares

Equity shares that carry less than one vote each, letting a company raise capital without diluting control — and letting an investor who does not want the vote buy the same economics at a discount.

In plain language

A DVR is an ordinary share in almost every respect. It carries the same claim on profits and the same claim on assets. What it does not carry is a full vote — under the framework the workbook describes, a DVR gives less than one voting right per share, and how much less varies from company to company.

That suits two parties. The issuer raises money without handing over proportionate control. The investor who was never going to attend a general meeting collects the dividends and the capital appreciation, and pays less for them, because DVRs trade as a separate scrip at a discount to the ordinary shares.

How it works

The Companies Act, 2013 sets the eligibility, and the workbook gives two tests:

  • The company must have paid a dividend of at least 10% over the preceding three years.
  • Such shares shall not exceed 25% of the total post-issue paid-up capital.

DVRs are listed and traded separately from the ordinary shares, which is why they develop their own price and their own, usually thinner, liquidity. Several Indian companies have issued them, Tata Motors and Pantaloons among them.

The discount is the market's valuation of the missing vote. It is not a mispricing to be arbitraged; it is the price of a different instrument, and it can widen as easily as it can narrow.

The formula

Total votes = Ordinary shares × 1
            + DVR shares × votes per DVR

Economic stake = shares held ÷ total shares (ordinary + DVR)
Voting stake   = votes held ÷ total votes

A worked example

An automobile company has 360 crore ordinary shares. It issues 40 crore DVR shares, each carrying one vote for every ten shares.

The 25% test: DVRs are 40 ÷ 400 = 10% of post-issue paid-up capital, comfortably inside the ceiling.

What it does to control. The promoter holds 180 crore ordinary shares.

Before: 180 ÷ 360 = 50.00% of equity and 50.00% of votes

After:  Total votes = 360 + (40 ÷ 10) = 364
        Promoter votes  = 180 ÷ 364 = 49.45%
        Promoter economics = 180 ÷ 400 = 45.00%

The promoter gave away 5 percentage points of economic ownership and 0.55 of a percentage point of control. That is the whole point of the instrument.

What it does for the buyer. The ordinary share trades at Rs 400, the DVR at Rs 240 — a 40% discount. If the company pays Rs 12 a share on both classes:

Ordinary: 12 ÷ 400 = 3.00% dividend yield
DVR:      12 ÷ 240 = 5.00% dividend yield

An investor putting Rs 24 lakh into DVRs buys 10,000 shares and Rs 1.20 lakh of annual dividend; the same Rs 24 lakh in ordinary shares buys 6,000 shares and Rs 72,000. The extra Rs 48,000 a year is what the market pays for surrendering the vote.

Why NISM asks about it

Chapter 3 (Terminology in Equity and Debt Markets, section 3.1.14) covers DVRs in the equity terminology block. Expect a question on the two Companies Act eligibility conditions — the 10% dividend over three preceding years and the 25% cap on post-issue paid-up capital — and on why a DVR trades at a discount.

Common exam traps

  • "Differential" means fewer votes here, not more. In the framework Chapter 3.1.14 describes, a DVR carries less than one voting right per share.
  • Both eligibility tests must be quoted. A dividend of at least 10% in the preceding three years, and a cap at 25% of total post-issue paid-up capital.
  • The discount is a price, not a bargain. It compensates for the missing vote and for thinner liquidity, and it can widen.
  • A DVR is equity, not a preference share. There is no fixed dividend and no priority in liquidation over ordinary shares.
  • It is a separate scrip with a separate price. Holding period returns on the DVR and the ordinary share can diverge substantially even though the underlying business is one.
  • Outside the workbook, SEBI's 2019 framework also permits superior voting rights shares for promoters of certain companies at the time of listing. Chapter 3 teaches only the fractional-voting variety; answer what is printed.

Check yourself

  1. 1.Under the Companies Act, 2013, DVR shares may not exceed what proportion of post-issue paid up capital, and what dividend history is required?

    1. a)10% of capital; dividend of at least 25% over the preceding 3 years
    2. b)25% of the total post-issue paid up capital; a dividend of at least 10% over the preceding 3 years
    3. c)50% of capital; a dividend in any one of the preceding 3 years
    4. d)There is no limit; only board approval is required
    Show the answer

    Answer: (b) 25% of the total post-issue paid up capital; a dividend of at least 10% over the preceding 3 years

    The Companies Act, 2013 defines the eligibility of a company to issue such shares. This includes a dividend of at least 10% over the preceding 3 years and such shares shall not exceed 25% of the total post-issue paid up capital of the company.

    Option A reverses the two percentages, which is the trap.

    What a DVR is: a DVR is just like a normal share of a company, except that it carries less than 1 voting right per share unlike a common share.

    Who wants them, on each side: such an instrument is useful for issuers who wish to raise capital without diluting voting rights. Investors who wish to invest only for dividends and capital appreciation and are not really bothered about voting rights find these shares attractive.

    How they trade: the number of voting rights for a DVR differs from company to company. DVRs typically trade as a separate category of instrument and are available at a discount to the common shares of a company.

    The discount is the market pricing the lost votes.

    Indian examples named in the workbook: Tata Motors and Pantaloons.

Where this is taught

Free preparation for NISM Series XV

Related terms

← All terms
Something look wrong? Report it