DVRs - THE NEW 'STAR' ON DALAL STREET
By Ruma Dubey
Tata Motors DVR has been hitting new highs consistently. Future Retail DVR has not been hitting new highs but yesterday, it closed over 9% higher. Gujarat NRE Coke breached the upper circuit on 18th August and yesterday closed strongly in the green. Jain Irrigation is the only listed DVR which is in the red. But majority, all the listed DVRs – all three of the four listed are doing very well. And investors are now asking – why aren’t there more DVRs listed?
Well, this appetite for DVRs or Differential Voting Rights has grown only since the past couple of days. Suddenly they have shot into the limelight and people asking more about this instrument of investment.
DVRs are not bonds, they are like any other equity share but as the name suggests, carries differential voting rights – this means they actually fewer voting rights than equity shares but these lower voting rights are compensated usually with a much higher dividend payout. The good part about DVRs is that because investors are ready to relinquish some of their voting rights, they get the shares at much discounted rates but higher dividends. This is a great instrument for small retail investors who are not really seeking any voting rights in the company but are rather looking at higher returns via dividends – usually it is a dividend 5% higher than ordinary shares dividend. Tata Motors DVR in 2014 earned a dividend of 105% while ordinary shares earned 100%.
Usually, DVRs in developed countries trade at 10-15% discount to the ordinary shares but here in India, the difference between DVRs and ordinary shares is around 50%.
Tata Motors was the first company to issue DVRs – it offered 1 DVR share for 6 ordinary shares held in a rights issue. In terms of voting rights – it was one vote for every 10 DVR shares held. This was followed immediately by Future Retail (Pantaloon Retail India then) and in 2009 we had Gujarat NRE Coke, followed by Jain Irrigation.
If one looks at things logically, it is DVRs that we small investors who do not really vote most of the times who should go for DVRs. But probably due to lack of awareness, DVRs never really took off and apart from these four companies, no one has yet offered DVRs, since 2001 when it was first permitted by SEBI.
But a sudden interest has perked up on all the DVR counters, with people actually asking about them over the past few days. This can be attributed to the news doing the rounds that DVRs might soon become part of the BSE Sensex and Nifty. And what this in turn means is that those who invest for returns only and not for controlling the company, could get attracted to DVRs once it is on the benchmark indices. And if the demand starts rising by including them in Nifty and Sensex, it could mean that the discount gap between the ordinary shares stock price and DVRs listed price could narrow down from to globally acceptable gaps of 10-15%.
This sudden need to include in the benchmark indices could have been prompted due to two reasons – Brazil and USA’s S&P 500 recently included DVRs in their benchmark indices and thus India might want to follow suit. Secondly, it could also herald the coming of more DVRs as there are many stocks, especially state run banks which need to raise funds without diluting their voting rights and might use the DVR route to do so. Thus if they become a part of the Nifty or Sensex, it will give the companies dual listed stocks and thus dual advantages.
DVRs are very good tools of investment for those not seeking any voting rights. This works best when the company’s management is trust worthy or else relinquishing voting rights and allowing the promoters a free run might prove detrimental. Best strategy – invest in the DVRs when the gap between the ordinary share price and DVR price is larger, as one will gain not only from capital appreciation as gap closes but will also get higher dividends. Once the gap narrows, one can sell the DVRs and invest in the ordinary shares – getting best of both the worlds!