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India's Third Giant Leap

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Are dividends more lucrative than voting rights?
Tue, 13 Mar Pre-Open

The Indian stock markets have rallied 11% since the start of 2012, but it is the shares with differential voting rights (DVR) that are hogging the limelight. DVRs are like ordinary equity shares but with differential voting rights. They are listed and traded in the same manner as ordinary equity shares. However, they mostly trade at a discount as they provide fewer voting rights compared to ordinary equity shares. Companies generally compensate DVR investors with a higher dividend payout.

In India, even after a decade since the product was introduced, the concept of DVR is yet to gain wide acceptance. This is due to lack of understanding and awareness about the product. As a result there are only four listed DVRs issued by Tata Motors, Pantaloon Retail, Gujarat NRE Coke and Jain Irrigation Systems. However, all of them have out-performed the corresponding shares in February 2012. The gap between these companies' DVRs and ordinary shares has thus narrowed in the past month.

So does it make sense to invest in DVRS?

For an investor, who believes in being a part of the company's decision processes, DVR shares are not attractive due to limited voting rights. However, if one is a minority investor and is not concerned much about voting rights per se, then investing in the DVR would certainly be an attractive proposition. DVRs mostly trade at a discount, largely due to the fewer voting rights they enjoy. However, at times, the gap between DVR and ordinary shares is large, providing good opportunity to investors. First of all, an investor stands to gain from capital appreciation in a scenario where the price differential between the ordinary share and the DVR share reduces over a period as a result of rising awareness about the product. Secondly, the DVR investor will also be entitled to higher dividends. The only caveat is that before investing in a DVR, investors need to be comfortable about the company's fundamentals and future prospects. And most importantly have trust in its management's quality and credibility.

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