Shares With Superior Voting Rights Are Chaotic; Why They Must Be Avoided

Shares with differential voting rights (DVR) were introduced in India for the first time by Tata Motors in 2008. Soon, Gujarat NRE Coke, Pantaloon Retail and Jain Irrigation followed suit. But none of them succeeded in the market.

A token 5 per cent higher dividend was no adequate compensation for stripping 90 per cent of the voting rights. Yes, Tata Motors DVR commanded just tenth of the voting right commanded by a full-fledged share.

In the takeover sweepstakes, it is ultimately the voting rights that matter. Tata Motors committed the mistake of not listing the DVRs in the ADR market resulting in lack of price discovery for DVRs back home. Not that it would have endeared them to the investors back home.

The Companies Act, 2013 has permitted its obverse — shares with superior voting rights. As much as 74 per cent of the share capital now can be bought by way of superior voting rights. This is just semantics.

The idea being promoters of startups should be able to raise 26 per cent of the remaining capital from deep-pocketed foreigners conferring on them inferior voting rights. The Securities and Exchange Board of India (SEBI) now wants to tweak the regulations so that there are takers for this discriminatory regime.

The truth is no amount of tweaking will interest the investors so long as the market for shares has a huge in-built control premium. Shares with inferior voting rights do not excite the investors, period.

Preferential shares have died their natural death in India. While it lasted, it conferred two preferences vis-a-vis equity shares — assured pre-stated dividend with arrears getting accumulated in case of cumulative preference shares and preference in the matter of repayment of capital on winding up vis-s-vis the equity shareholders.

Total absence of voting rights on them except in the event of default in dividend for a specified period of time reduced them to glorified but unsecured debentures so much so that investors said they would rather invest in secured debentures with a marginally lesser assured interest rather than in preference shares. The point is hermaphrodite financial products are not favoured by investors.

While preferential shares were hermaphrodites in the sense that they partook some of the features of equity and some of debentures, shares with superior voting rights create a class divide among equity shareholders themselves.

Why should one invest in the innately risky equity when he has to share all the downside risks of equity investments in return for a token higher dividend if and when declared with truncated voting rights?

A token 5 per cent differential higher dividend is hardly compensation enough especially given the truncated voting rights which are valuable when the acquirer is on the prowl. He would look askance at shares with inferior voting rights. Above all, chaos reigns when buyers and sellers have to steer through the minefield of shares littered with superior and inferior voting rights.

Tinkering should not be equated with progress. Financial products especially those meant for public participation must be simple.

Already shares of companies that are listed abroad by way of global depository receipts (GDR) or American depository receipts (ADR) give enormous arbitrage opportunities to the foreigners with two-way conversion opportunity beckoning them — convert their GDR into shares for selling in Indian bourses if the prices are higher in domestic markets or convert their shares back into GDR for trading in the foreign bourses where they are listed in a clutter of confusion.

But then GDR/ADR regime is absolutely essential because an INR denominated instrument cannot be listed in foreign bourses.

However, shares with differential voting rights or superior voting rights are eminently avoidable as apart from novelty they have nothing else to offer as evident from the lukewarm response to them.