The DVR appears to be a good product for small retail investors who do not attend AGMs or vote in the AGMs, this is a good way to get earn higher dividends and ensure much higher dividend yields. After all, you are getting DVRs at such a steep discount. Despite all these advantages, DVR shares as a concept become not popular in India. There are 5 reasons for the same.
Dividend differential really needs to be substantial to encourage shareholders to give up voting rights. In the case of Tata Motors the dividend advantage is just 5%. That means that if the ordinary shareholders are paid a rupee dividend of Rs.20, the DVR holders get a dividend of Rs.21. Shareholders do not appear to believe that is good enough deal to give up 90% voting rights. More so, since the discount has shown the propensity to occasionally widen.
Liquidity in DVRs is another issue as institutions have not been too keen to participate. Tata Motors DVR did see a build-up in volumes after its inclusion in the Nifty but other DVRs have hardly built any trading interest in the DVRs. That makes it hard to get institutional investors interested in the DVRs, as control and voting power is a key factor for institutional investors.
According to SEBI guidelines, a large dividend over ordinary shareholders is not permitted. If you look at the 3 companies that issued DVRs, the dividend differential is hardly attractive. For example, Tata Motors DVR pays just 5% extra while the Future Enterprises DVR pays just 4 paisa extra dividend. Jain Irrigation pays the same dividends to its ordinary shareholders and to its DVR shareholders. That does not leave the investors too excited about DVRs. That is one of the reasons why DVRs have not really taken off in India.
Institution investors are, by default, not too keen to invest in equity without voting rights. Especially in case of corporate governance issues like Infosys and the Tatas faced in the past, institutions would prefer to have a say in the vote. DVR does not offer than benefit.
DVR may be a good concept but unless SEBI permits a lot more of flexibility in the structuring of DVRs like in the US; this product would really struggle to take off!
SEBI Compliance
🏠 Ozg Law Group
Email: sebi@ozg.co.in
