What is DVR Share? Meaning, Benefits, and Limitations

DVR is the short form of Differential Voting Rights (DVR). Holding voting rights is a significant factor while investing in a company’s stock. Voting rights allow shareholders to participate in a company's decision-making process. Previously, the principle of one vote per share was followed. However, this changed with the introduction of DVR shares in India. They were first issued in the year 2000. Let’s learn what a DVR share is in this article.

Key Highlights

• Differential Voting Rights or DVR shares offer shareholders low or no voting rights.
• DVR shares are listed at discounted prices to attract more investors.
• Dividend yields are usually higher on DVR shares.

DVR Shares Meaning

Differential voting rights (DVR) shares are similar to equity shares with differential voting rights. In contrast to other shares, DVR shares may have more or fewer voting rights. They have fewer voting rights and are typically traded at a discount. Sometimes, they may trade even at a 30% discount on the base price. DVR shares are listed on the stock exchanges just like other ordinary shares.

Why Do Companies Issue DVR Shares?

A company requires capital to grow. Often, it has to find potential investors who are willing to invest. However, this dilutes the ownership stake of the founders. DVR shares help companies raise the required capital while protecting their interest. So, issuing DVR shares is an excellent way to get investors who don’t want to participate in the company’s workings.

In addition, companies usually issue DVR shares for the following reasons.

• To prevent hostile takeovers
• To attract retail investors
• To protect the voting rights of promoters from dilution

Eligibility Criteria to Issue DVR Shares

To issue shares with varying voting rights, companies must fulfil these requirements.

• The company's articles of association must authorise the issuance of shares.
• The company must record distributable profits for the past three years.
• The company must have filed its annual returns for the past three years without any defaults.
• The company must not have had any defaults in repaying deposits or loans and must not have delayed paying any declared dividends.
• The company must not have been penalised by a tribunal or court in the past three years.
• DVR shares cannot be more than 26% of the company's post-issue paid-up equity capital.

Companies should ensure that the issue is in line with these eligibility standards. However, investing in DVR shares does not have such strict qualifying requirements.

Advantages of Investing in DVR Shares

Here are the advantages of investing in DVR shares.

1. A good investment option: You may earn returns from a very successful company without having to deal with the firm's day-to-day operations.

2. Reduced rates: You may invest according to your budget as DVR shares are listed on the public exchange at lower prices.

3. Higher dividends: Compared to common shares, returns on DVR shares are higher. Additionally, the dividends are even higher because these shares are listed at discounted prices.

Limitations of Investing in DVR Shares

The following are the drawbacks of DVR shares.

• Limited awareness: Investors often miss out on opportunities to invest in DVR shares because they are unaware of their issuance.

• Reduced voting rights: DVR shareholders typically have fewer voting rights than holders of ordinary equity shares. This can disadvantage investors who want to give their opinion on the company's working.

• Potential misuse of voting power: There is a risk that promoters may misuse their voting power, which can disadvantage the shareholders.

• Lower liquidity: DVR shares are generally less liquid than regular equity shares. Thus, it may be more difficult to buy or sell them.

Conclusion

Earlier, Indian regulations did not permit companies to issue equity shares with higher voting rights. However, individual companies can now issue shares with superior voting rights. This might make DVR shares more appealing in the Indian stock market. In addition, the startups are eligible to receive up to 74% of the total capital as DVR shares. However, before buying these shares, investors should ensure they can get significant returns to balance the loss of voting rights.