Will differential voting rights work in India?
There is an international body of literature that has rigorously investigated this which could provide the guiding light for India.
The concept is good but the devil is in the details. The Tatas having set a benchmark may prompt many investors to consider this avenue. There is an international body of literature that has rigorously investigated this which could provide the guiding light for India.
Narayan Ramachandran MD & Country Head, Morgan Stanley
We should recognise that in order to sell non-voting shares, companies would have to necessarily add the sweetener of higher dividend, compared to shares enjoying voting rights. Differential dividend and differential voting have an inverse relationship; greater the dividend, lesser the voting rights and vice-versa.
Differential voting rights can work every where in the world, and so also in India. These are ideally good instruments for passive investors, typically small investors, who seek higher dividend, and are not necessarily interested in taking a voting position. It is clear that no investor would agree to a sacrifice, which differential voting rights lead to, unless they are suitably compensated, and compensated in financial terms.
Since institutions are active investors, at least they are supposed to be so as per their charters, I do not think there would be any significant demand from them for such shares. Significantly, they invest primarily for capital gains, and not for dividends. There is one operational issue.
Prithvi Haldea, managing director, Prime Database
The concept will work, but eventually, once investors are familiar with the product. As the markets become more sophisticated, there has to be new instruments with economic value. I think shares that carry one-tenth the voting rights as compared to a normal share, should trade at a discount of 8-10%.
What will decide the popularity of differential voting rights shares is the reason for which the shares are being issued. A company could issue it either due to corporate governance issues (the management may not want any interference in its style of functioning) or to prevent a hostile takeover.
To popularise them, the company should compensate investors for loss in voting rights with a slightly higher dividend as compared to the regular shares.
It is a good concept, but will take some time to catch on. It should command a discount. Internationally (US, UK), the discount is in the range of 10-20%. Institutional interest would largely depend on their focus of interest. Retail participation will be motivated more by return on capital, however if overall discount is good they will go for it.
Narayan SA, managing director, Kotak Securities
Conceptwise it is a good move. It will add liquidity particularly in stocks from sectors where there are regulatory restrictions as to how much foreign institutional investors can hold. I expect such a product to be in demand with institutions.
As regards retail, they will go where there is liquidity and better pricing. If they get a good discount, they will definitely go for it, as most individuals are comfortable holding non-voting shares.
Dharmesh Mehta, head, Broking, Enam Securities
Narayan Ramachandran MD & Country Head, Morgan Stanley
We should recognise that in order to sell non-voting shares, companies would have to necessarily add the sweetener of higher dividend, compared to shares enjoying voting rights. Differential dividend and differential voting have an inverse relationship; greater the dividend, lesser the voting rights and vice-versa.
Differential voting rights can work every where in the world, and so also in India. These are ideally good instruments for passive investors, typically small investors, who seek higher dividend, and are not necessarily interested in taking a voting position. It is clear that no investor would agree to a sacrifice, which differential voting rights lead to, unless they are suitably compensated, and compensated in financial terms.
Since institutions are active investors, at least they are supposed to be so as per their charters, I do not think there would be any significant demand from them for such shares. Significantly, they invest primarily for capital gains, and not for dividends. There is one operational issue.
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The law provides for issue of shares with differential voting rights. This means that a company may issue shares carrying voting rights with different weights, for example with weights of 100 and say 75 and say 50 and say 0. This, however, can lead to huge confusion. Prithvi Haldea, managing director, Prime Database
The concept will work, but eventually, once investors are familiar with the product. As the markets become more sophisticated, there has to be new instruments with economic value. I think shares that carry one-tenth the voting rights as compared to a normal share, should trade at a discount of 8-10%.
What will decide the popularity of differential voting rights shares is the reason for which the shares are being issued. A company could issue it either due to corporate governance issues (the management may not want any interference in its style of functioning) or to prevent a hostile takeover.
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In large companies, the reason is likely to be the latter. Again, I think preferential voting rights shares are unlikely to be in favour with many institutional investors, as their charters prevent them from buying such shares. These shares are likely to be a hit with retail investors and high net worth individuals. To popularise them, the company should compensate investors for loss in voting rights with a slightly higher dividend as compared to the regular shares.
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Rashesh Shah, CEO & MD, Edelweiss CapitalIt is a good concept, but will take some time to catch on. It should command a discount. Internationally (US, UK), the discount is in the range of 10-20%. Institutional interest would largely depend on their focus of interest. Retail participation will be motivated more by return on capital, however if overall discount is good they will go for it.
Narayan SA, managing director, Kotak Securities
Conceptwise it is a good move. It will add liquidity particularly in stocks from sectors where there are regulatory restrictions as to how much foreign institutional investors can hold. I expect such a product to be in demand with institutions.
As regards retail, they will go where there is liquidity and better pricing. If they get a good discount, they will definitely go for it, as most individuals are comfortable holding non-voting shares.
Dharmesh Mehta, head, Broking, Enam Securities
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