DVR: Issue Equity Shares without diluting your Control

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Did you know, that there are equity shares that offer only dividends and an opportunity for price appreciation but without the voting rights. This means you get to issue equity shares for the purpose of raising funds but without diluting your control.

Facebook is one company which has done this. When they issued shares to their investors, they issued them with lesser voting rights. And this is the reason why Mark Zuckerberg holds more voting rights as compared to his percentage holdings because he only sold his holdings but not his voting rights.

Same is the case with several Indian Companies which are listed on the stock exchanges like Tata Motors, Gujarat NRE Coke etc.

Several small Indian start-ups have also now started issuing differential voting rights.

Sounds interesting? Well, it is.

Let’s have a look at it in detail,

DVR: Differential Voting Rights Equity shares

Differential Voting Rights equity shares are the ones that offer differential voting and dividend rights. It is just like the normal equity shares but come with almost nil voting rights or higher voting rights.

The most common ones are with no voting rights which are traded on the stock exchange just like regular equity shares but at a discount and generally offers higher dividend.

For private companies, these can be issued to the investors just like normal equity but the owner/founder of the company gets to retain the control of the company.

For instance, if a normal equity share has declared a dividend of 1% then a DVR share may declare it at 5%. Also, if the market value of a normal equity share is say Rs. 500, then the value of a DVR equity share will be Rs. 200.

What are the benefits of DVR equity shares?

The benefits of DVR equity shares can be seen from two perspectives, one from the lens of the company and the other from the investor’s.

Let’s look at each of them in detail,

Advantages to the Company of issuing DVR equity shares

Currently, there are very few companies that have issued DVR equity shares. It mostly due to lack of awareness. But the trend of issuing DVR’s is picking up especially in private companies.

Let’s look at the benefits of issuing a DVR equity shares, that these few smart companies are banking.

  1. No dilution of control

While a normal equity share comes with some voting power, by issuing DVR shares, the company can keep the control to itself and still raise money. The company can choose how much of its power does it want to dilute.

  1. Choose your preference

Your company can choose which kind of DVR shares would you like to issue and how much voting rights will each share hold.

  1. Safeguard against hostile takeover

When equity shares are issued with voting rights, there is a chance that one person/institution can hold majority of the shares and hence takeover the control of the company from the management.

Dis-advantage to the Company of issuing DVR equity shares

The only disadvantage or you can say limitation of issuing a DVR share is that it might be difficult to find an investor who accepts DVR shares. For a private company, usually the investor needs voting rights and control along with the equity share. A retail investor on the other hand, who is just interested in dividends and capital appreciation, might opt for DVR shares.

Advantages to the Investor for buying DVR equity shares

Issuing a DVR equity share will only make sense, if you have an investor. Let’s see the benefits of buying a DVR share for an investor, which will make it all the more viable to issue one.

  1. All other rights intact

Apart from the voting rights, a DVR shareholder will get all the other rights such as rights share, bonus shares etc. Therefore, you are a regular investor and are not interested in the management of the affairs of the company, you can opt for DVR shares and enjoy all the other rights of an equity shares that come along with it.

  1. Less investment

DVR shares with less or no voting rights are usually offered at a discount as compared to the normal equity shares. By subscribing to DVR shares you get to pay less for the same benefits as that of a regular equity shares.

  1. Higher dividend

DVR shares have another added benefit, i.e. they generally pay more dividend than the regular equity shares.

Looking at the benefits from both the issuer and the investor point of view, it can be safely concluded that DVR shares are a win-win for both of them. On one hand where it helps the issuer to retain the control on the other hand it helps the investor earn more dividends.

Investor: Limitation of subscribing to DVR equity shares

The only limitation of subscribing to DVR equity shares is that if you want a control in the management of the company such that your input can help in the growth of it, then you may not want the DVR shares, instead you might want to opt for regular equity shares.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.