Recently, Tata Motors announced its withdrawal of differential voting rights. In a notification to the stock exchanges, the company said it issued the ‘A’ Ordinary Shares in 2008 as part of a rights issue with the objective of funding certain overseas investments. 

“The rights attached to the ‘A’ Ordinary Shares are similar to the rights attached to the Ordinary Shares in all respects except as to voting and dividend. Subsequent regulatory changes restricted the issuance of shares with differential voting rights (DVR), resulting in a narrow market for similar instruments,” Tata Motors said as one of the reasons to cancel the instrument. 

First to hit DVR

In fact, Tata Motors was the first Indian company to come with DVR issue in November 2008 at ₹305 as a part of its ₹4,145-crore rights issue to meet debt obligations for the acquisition of Jaguar Land Rover. Companies such as Gujarat NRE Coke, Pantaloon Retail India (now rechristened as Future Retail), Jain Irrigation, Stampede Capital (now known as GACM Technologies) have also issued shares with differential rights. 

However, when Tata Motors approached the Securities and Exchange Board of India in 2009 to come out with another DVR issue, SEBI nixed it. SEBI’s apprehension then was that the existence of a large number of shares with DVRs may give unnecessary advantage to promoters on important decisions where every vote counts. 

However, the regulator allowed superior voting rights in 2019, as promoters of lot of new-age companies with smaller shareholding feared that they may lose out in a corporate battle. 

Superior voting rights

“New technology firms typically employ asset light business model whereby the firm owns relatively fewer capital assets compared to the value of its operations. Such firms prefer equity over debt capital and raising equity on a periodic basis leads to dilution of founder/promoter stake. In such new technology firms, where the promoter/founders are instrumental in the success of the firms, there is a need for a structure to enable them to retain decision-making powers and rights vis-à-vis other shareholder,” the regulator said. 

However, SEBI has currently imposed restrictions on the issuance of DVRs to new tech companies. This decision has had significant implications, leading to a rather disheartening situation for successful DVR holders like Tata Motors. Despite enjoying immense investor interest and having been a part of the Nifty index, Tata Motors is compelled to go off the mainboard.

Given that most retail investors do not participate in the voting, with many not even bothering to open the email sent to them on voting process, investors will definitely not mind shares with inferior voting rights and higher dividend. Promoters also have little to fear given the investor indifference. 

May be its time for SEBI to tweak the DVR rules and issue new set of guidelines addressing concerns of all stakeholders. To start with, SEBI can allow the top 100 listed companies to issue DVRs and gradually expand the list. 

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