Equity Shares with Differential Voting Rights
Equity Shares with Differential Voting Rights (DVRs)
Definition:
Equity shares with differential voting rights are shares that carry voting rights different from ordinary equity shares. This means that holders of these shares have either more or fewer voting rights per share compared to regular equity shares.
Key Features of DVR Shares
| Feature | Explanation |
|---|---|
| Voting Rights | Can be higher or lower than ordinary shares (e.g., 10 votes per share or 1/10th vote per share). |
| Dividend Rights | Usually similar or sometimes slightly higher/lower than ordinary shares. |
| Purpose | To allow promoters/founders to retain control without holding a majority of equity capital. |
| Tradability | Usually listed and tradable but sometimes with restrictions. |
| Eligibility | Typically issued under specific regulations by companies to raise capital without diluting control. |
Why Issue DVR Shares?
Maintain Control: Founders or promoters can raise capital without losing control since voting rights can be concentrated in their shares.
Attract Investors: Investors get the benefit of dividends and capital appreciation but have limited or reduced voting power.
Flexibility: Companies can design different classes of shares tailored to business needs.
Regulatory Framework in India
The Companies Act, 2013 (Section 43) permits the issuance of shares with differential voting rights subject to conditions.
SEBI Listing Regulations allow listed companies to issue DVR shares but restrict the voting rights disparity to a maximum of 10 times the voting rights of ordinary shares.
The company must disclose the rights attached to DVR shares clearly in the prospectus and to the stock exchanges.
DVR shares cannot carry voting rights in certain critical matters, such as removal of directors or alteration of shareholder rights.
Advantages
Helps promoters retain control.
Attracts investors interested mainly in dividends and capital appreciation.
Provides flexibility in capital structuring.
Disadvantages
May reduce shareholder democracy.
Can deter investors concerned about governance and influence.
Potentially lower liquidity and marketability for DVR shares.
Example
Suppose a company issues two types of shares:
Ordinary shares: 1 vote per share
DVR shares: 10 votes per share
If a promoter holds 10% of total shares but all are DVR shares, they can still control a majority of the votes.
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