Ayushi Khorana.Ayan Das.

Dharna Dugar.Harsh Kariwala.

Rahul Jaiswal.Shreyta Agarwal.

DIFFERENTIAL VOTING RIGHTS.

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.

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

CONDITIONS FOR ELIGIBILITYTo 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 eligibleto 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.

• 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 rightsand 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.

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.

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.”

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

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

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.

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.

• How did the company arrive at this price of Rs 305 versus the normal rights shares at Rs 340?

• Why one-tenth?

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.

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

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

THE ROAD AHEAD1) 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.

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.

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

THANK YOU.