New norms for DVR shares - Will it excite the corporates?

Many corporate in India issue Differential voting rights (DVR) shares as a means to raise capital without diluting control.  Many companies like Tata motors, Jain Irrigation and Future group have their DVR shares listed on the exchanges. Last week, new norms for DVR shares were issued which can help the instrument become more meaningful.

One of the reasons most promoters did not liked the idea of DVR shares was that the total proportion of DVR shares could not exceed 26%. That means promoters would be vulnerable to external takeover attacks as it happened in the case of Mindtree where promoters had 10% stake and could not stop L&T hostile takeoverNow that limit has been raised from 26% to 74%. Companies will now be allowed to issue up to 74% of the voting rights to the existing promoters even if the actual share of capital they own is just 10%. This will be a big boost for start up businesses and small entrepreneurs to raise capital for their business expansion without worrying about dilution of their stake. We saw forced dilution in Flipkart. Both situations could have been avoided with DVRs.

One of the conditions of the current DVR regulations was that the company needed to have a 3 year track record of profitability to be eligible for the issue of DVRs. That would have kept most start ups out of the eligible list because typically start-ups sink loads of capital into the company before they can even think of becoming profitable. This is a welcome change. Additionally, higher voting shares issued as ESOPs to promoters has been changed from 5 years to 10 years in case of start-ups giving importance to higher gestation period.

It needs to be seen however how much of this will be exciting for corporates. A semi-convertible structure would work better where there is a fixed payout for some time before it is converted into equity. That should interest a lot of institutions but without some other interesting sweeteners, DVR market in India may not excite the corporate much.

The author may have positions in the stocks as mentioned in the article above, please assume us to be biased. This is not a recommendation to buy or sell securities. This is purely information about the company mentioned.  Equity investing contain risks and please consult your financial adviser for any buy and sell securities!


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