Difference between DVR and Ordinary Shares

When you invest in the stock market, you come across different types of shares. Two of the most commonly discussed types are DVR (Differential Voting Rights) shares and ordinary shares. These shares represent ownership in a company, but they differ mainly in terms of voting rights and dividend payments. DVR shares offer higher dividends but come with limited voting rights, while ordinary shares offer full voting rights. Understanding the difference between the two can help investors choose the right type of shares based on their preferences for income generation and control over the company.

What are DVR Shares?

DVR shares are a special class of shares where investors receive limited voting rights, usually 1/10th of the voting rights offered to holders of ordinary shares. To make up for the lower voting power, DVR shares offer higher dividends to compensate investors. The companies issuing DVR shares typically do so when they want to raise capital but still maintain control over the company. DVR shares allow companies to provide returns to their shareholders in the form of higher dividends, while the control stays in the hands of promoters or major stakeholders. These shares are especially popular in markets like India, where they are regulated by SEBI (Securities and Exchange Board of India).

What Are Ordinary Shares?

Ordinary shares are the most common form of equity in a company. These shares give the investor full voting rights, meaning you can vote on important company decisions like electing directors or approving mergers. Holders of ordinary shares are also eligible to receive dividends, although the amount of dividends can vary depending on the company’s performance. Ordinary shares are typically traded on stock exchanges, and their prices fluctuate based on the market demand for the stock. These shares represent a complete ownership stake in the company, giving shareholders both control and a share of the profits.

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Regulations governing the issuance of DVR Shares in India

In India, DVR shares are regulated by the Securities and Exchange Board of India (SEBI), which ensures that these shares are issued under strict guidelines. Companies wishing to issue DVR shares must meet specific criteria, including a minimum track record of 10 years of operations and a history of paying consistent dividends. Moreover, the company must seek approval from its shareholders through a special resolution before issuing these shares. SEBI also ensures that the rights of minority shareholders are protected and that the issuance of DVR shares does not lead to unfair control by the promoters.

Comparison between DVR and Ordinary Shares

FeatureDVR SharesOrdinary Shares

Voting RightsLimited voting rights (usually 1/10th of ordinary shares)Full voting rights on company decisionsDividendHigher dividends to compensate for limited voting rightsDividends vary based on company performanceOwnershipLimited ownership controlFull ownership with control over decisionsLiquidityLess liquid, traded less frequentlyMore liquid, actively traded in the marketMarket PopularityLess popular, mainly for income-focused investorsWidely popular, actively tradedControlControl remains with promotersShareholders have control based on voting rightsPriceGenerally priced lower than ordinary sharesGenerally priced higher, reflecting full ownershipRiskHigher risk due to low control and potential volatilityLower risk, but still subject to market fluctuationsCapital Growth PotentialLower potential for capital growthHigher potential for capital growth due to voting powerRegulationStrictly regulated by SEBIWidely regulated and commonly issued

Reasons to invest in DVR Shares

Investors may choose DVR shares for several reasons:

1. Attractive Dividends: DVR shares offer higher dividends compared to ordinary shares, which makes them appealing to income-seeking investors.
2. Lower Cost of Entry: DVR shares are typically priced lower than ordinary shares, allowing investors to purchase more shares with the same amount of money.
3. Limited Voting Rights: If voting rights are not important to you, then the higher dividend return may make DVR shares an appealing choice for your portfolio.
4. Potential for Consistent Returns: Companies issuing DVR shares often offer steady dividends to their investors, making them attractive for those looking for stable income.

Advantages of Holding DVR Shares

Holding DVR shares comes with several advantages:

1. Higher Dividends: Investors receive higher dividends as a trade-off for limited voting rights, making DVR shares a good choice for those looking for income generation.
2. Affordable Investment: Since DVR shares are typically priced lower than ordinary shares, they provide an affordable way to invest in smaller companies or high-potential businesses.
3. Control Remains with Promoters: For those who don’t mind limited control, DVR shares allow companies to raise funds while keeping decision-making power with the promoters.
4. Reduced Risk for Promoters: Since the promoters retain control, there is less likelihood of hostile takeovers or changes in the company’s direction, leading to more stability.

Choosing between DVR shares and ordinary shares depends on your investment goals. If you’re looking for higher dividends and are not concerned with voting power, DVR shares could be a good choice. On the other hand, if you want full control over the company’s decisions and have the potential for capital growth, ordinary shares are the better option. Both types of shares have their pros and cons, and understanding your priorities as an investor will help you decide which one to invest in.