Question

why listing of shares with different voting rights will avoid profitable takeovers and differential voting shares cannot really promote long term investment but only short term investment. This share structure may encourage the entrenchment of the core shareholders

Answer 1

Differential Voting Rights (DVR) shares are similar to Ordinary shares, but DVR shares provide less or no voting rights as compared to the ordinary shares.

For Eg:- An ordinary equity shareholder of Tata Motors who has 100 ordinary shares will get voting rights of 100 shares. However, the same investor who has also invested in the same number of shares in Tata Motors DVR will get 1/10th or no voting rights (i.e 10 votes per 100 shares).

How DVR is mostly used:-

• DVR is one of the ways for companies to raise additional capital. It can do so without diluting the existing shareholding pattern.
• This helps company to raise money without worrying about the company’s takeover bids. This is because, DVR holders may either have voting rights which are not closely relative to ordinary shareholders or may not have voting rights at all.
• As this option bodes well for companies with lack of investible funds or distributable profits and are prone to a hostile takeover, this also provides those companies with an opportunity to broaden their capital base, and by keeping the control or management of the company.
• With the same shareholding pattern and increased capital base, it helps companies to fund large projects and also facilitates better decision making.
• The main cluster of investors in these DVRs are strategic in nature who invest in these in order to make quick bucks and are not interested in capturing the control of the company.
• DVRs are generally offered at discounted price to the ordinary shares. Hence, these attract all kinds of investors who seek get discounted price and incremental dividend.
• As these DVR holders seek returns in the short term, they don’t intend to stay put for longer term with their investment, because of their less/no say in the company’s workings/management. Hence, DVRs do not promote long term investment.
• However, with no dilution in shareholding and increased capital, the existing investors tend to gain in more ways than one

o Increased funds will fund new projects

o New projects generate cash flows

o Cash flows generate profits

o Profits result in higher dividends, bonus and increased shareholders wealth

o Undiluted voting rights result in passing resolutions quickly

• These are some of the points that encourage the core shareholders of the companies to stay put with their investment for longer term.