Differential treatment | Value Research The gap between Indian DVRs and the main shares has been narrowing

Differential treatment

The gap between Indian DVRs and the main shares has been narrowing

Differential treatment

Issue of fresh equity to raise capital not only dilutes the existing equity but also brings down the promoter's control over a company. To avoid dilution of control and prevent a hostile takeover, a number of companies, like Tata Motors, have issued shares with differential voting rights, or DVRs. Tata Motors issued DVRs when it wanted to raise capital for the acquisition of Jaguar and Land Rover in 2008.

So far four Indian companies have issued DVRs. DVRs are just like normal shares, only that they have no voting rights. They pay dividends also. In the case of Tata Motors, the dividend on the DVR is even higher than that on the ordinary shares.

DVRs trade at a discount to ordinary shares. In India, the difference between DVRs and ordinary shares is quite high. This is not the case in other developed markets like those of the US. The reason for the wide gap is that DVRs are still a new concept in India and investors are still skeptical about the characteristics of such instruments.

Hence, DVRs provide an opportunity to buy the underlying companies at a significant discount, yet you are entitled to the same dividend and capital appreciation. This is why DVR discounts have been coming down over the last several years (see the graphs). One caveat here is that DVRs tend to trade at a large discount in the companies with corporate-governance issues. This is because voting rights have higher importance in such companies. So, before you take a call on the narrowing of the gap between the DVR and the main share, do check the management's credentials.

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