DVRs: SEBI flip flop!

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DVRs: SEBI flip flop!

If there's one issue that plagues all business in India, it's regulatory flip flop. Earlier, we highlighted the regulatory schizophrenia regarding warrants. Here’s another case of differential voting rights shares, which is known as DVRs in the interest of brevity.

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Q: Sebi actively allowed for the Tata Motors' DVR to go through and in fact it was the first such big issue of differential voting right shares and at that very time Sebi's eyes were open to the fact that this offers a higher dividend. Why suddenly after one issue would they want to quickly withdraw their ability of companies to offer a higher dividend? Do you think that that to some extent, it might kill the attractiveness of this product? If you are going to get lower voting rights and equal economic interest then what are you buying DVR share for unless the price of issue is at a substantial discount to the ordinary share?

Sundaresan: The reaction has been to the abuse that one saw in the Jagatjit case where promotes allotted to themselves shares which at ten times voting power on the ordinary shares. Having done that, they are now regulating it in this manner and over a time regulation can evolve. If it turns out that with the market would not accept a product which has an inferior voting right but an equal dividend right.

Jaju: Financial markets thrive on innovation and for companies that need to raise capital having different products to be able to raise capital is always a positive. I am not talking about creativity here, but about innovation. DVR shares have been used world over to fund growth businesses

Q: They really haven't had much success in India.

Jaju: It is because there are just two companies and there is lack of pricing.

Q: Gujarat NRE Coke did one as well. I think a bonus issue of DVRs, right?

Jaju: They haven't listed as yet. I don't know what the status is. So there are only two companies which are listed Pantaloon and Tata Motors. I would rather go down to the root of Pantaloon where we had advised them to do a bonus issue to existing shareholders. So that there was no economic interest lost by shareholders because in case of a public offering or a right issue if people did not participate there were shares that were allotted to external shareholders at a price lower than the current market price, but in a bonus issue you get shares.

The moment there are three-four-five-ten examples of companies that are listed with DVR shares hopefully price discovery will be better. The fact is that when Tata Sons sold part of their DVR shares in Tata Motors and the kind of people that picked them up were all blue chip institutions. So there is appetite for DVR shares and from a shareholder perspective like Som said there is a set of people who are willing to take shares without voting rights whether it's through PNotes or otherwise.

Q: Is this a good instrument for them?

Jaju: If you are getting complete economic interest at 30% discount which is today or even 5% discount later, it would be an attractive instrument.