Differential Voting Rights Shares: Why DVRs Traded at a Discount and How Tata Motors Ended Its ‘A’ Shares

Differential voting rights shares, or DVRs, are equity shares that carry a different deal on voting or dividends from a company’s ordinary shares. In India the version most investors met was the low-vote kind: you got fewer votes per share and, in return, a slightly bigger dividend. On paper that sounds like a fair swap. In the market, it rarely worked out that way, and the reasons say a lot about how investors price control.

This piece walks through how DVRs are structured, what the rules allow today, why these shares kept trading at a wide discount, and how the best-known Indian DVR, Tata Motors’ ‘A’ Ordinary share, was finally folded back into the ordinary shares in 2024. We will also run a worked example so the numbers make sense.

What differential voting rights shares actually are

A normal equity share is simple: one share, one vote, and the same dividend per share as every other holder. A DVR breaks that link. The share still owns a slice of the company, still gets bonuses, rights and splits, but the votes attached to it, the dividend, or both are set differently in the terms of issue.

There are two directions this can go, and people mix them up all the time:

• Fewer votes per share. This is the classic Indian DVR. Tata Motors’ ‘A’ Ordinary shares carried one-tenth of the voting rights of an ordinary share, according to the company’s investor presentation on the cancellation scheme. Investors usually get a sweetener on dividends for giving up votes.
• More votes per share. These are superior voting rights (SR) shares, which let founders keep control after raising outside money. SEBI’s 2019 framework allows SR shares only for certain tech companies, with voting ratios between 2:1 and 10:1. We covered that structure separately in our guide to superior voting rights shares.

Both are “differential”, which is why the terms get blurred. For an ordinary investor, though, the experience is opposite. With a low-vote DVR, you are the one with less say. With SR shares, the founder has more say than you.

How DVR dividends work: the Tata Motors ‘A’ share terms

The cleanest real-world example of the dividend sweetener comes from Tata Motors’ own dividend distribution policy. It says holders of ‘A’ Ordinary shares were entitled to a dividend for each financial year at five percentage points more than the aggregate rate of dividend declared, if any, on Ordinary shares for that year.

Note the wording. It is five percentage points on the dividend rate, and Indian companies express that rate as a percentage of face value. It is not 5% more rupees, and it is not five extra rupees. Tata Motors shares had a face value of ₹2, as the company’s Regulation 30 filing on the scheme confirms. So the extra cash per share was small. We will put numbers on it below.

The company’s presentation also lays out the history: the ‘A’ shares were first issued in 2008 at a 10% discount to the ordinary shares, more were issued through a QIP in 2010 and a rights issue in 2015, and the shares were later included in index and F&O segments.

A low-vote DVR asks you to sell your say in the company for a few extra paise of dividend. The market has usually decided that is a bad trade.

The rules today: Companies Act limits and SEBI’s 2019 framework

Two regulators matter here, and they cover different ground.

Company law (MCA)

The Companies Act allows equity shares with differential rights, subject to the Companies (Share Capital and Debentures) Rules, 2014. In August 2019, the Ministry of Corporate Affairs amended those rules. According to the government’s press release, the earlier cap of 26% of total post-issue paid-up equity share capital was replaced with a cap of 74% of total voting power for shares with differential voting rights. The same amendment removed the old requirement that a company must have distributable profits for three years before it could issue DVRs.

The stated aim was to let promoters of Indian companies, particularly tech companies and startups, keep control while raising equity from global investors.

Securities law (SEBI)

SEBI’s view on listed companies is narrower. Its June 2019 board meeting release did two things relevant here:

• It created the SR share framework for tech companies going public, with conditions such as a promoter-group net worth cap of ₹500 crore, SR shares held for at least six months before the RHP, a 74% ceiling on SR holders’ total voting rights after listing, and a sunset that converts SR shares to ordinary shares on the fifth anniversary of listing (extendable once by five years).
• It stopped existing listed companies from issuing fractional rights shares, which is the low-vote DVR category. SEBI said it may review that after gaining enough experience with SR shares.

Tata Motors’ presentation adds that back in 2009, SEBI had already disallowed companies from creating a new class of shares with differential rights, while existing ‘A’ shares were allowed to continue. Put the two together and the practical picture is clear: a listed Indian company cannot launch a fresh batch of low-vote DVRs today. The ones investors traded were legacy instruments.

Why DVRs trade at a discount

Here is the puzzle. A DVR has the same claim on profits as an ordinary share, plus a slightly higher dividend. So why would it ever trade lower?

Tata Motors’ own numbers show how wide the gap got. Its presentation put the prevailing discount of ‘A’ shares to ordinary shares at about 43%, measured on closing prices of 24 July 2023, and the average discount from issue to that date at 42.4%. It also noted that the discount had not materially changed even after dividends were announced in May 2023.

We see a few reasons for that, and they apply to DVRs generally:

• Control has value. In a takeover, an open offer or a big related-party vote, votes matter. A low-vote share carries less of that option value.
• The dividend sweetener is tiny. Five percentage points on a ₹2 face value is ten paise per share. Against a share price in the hundreds, it barely moves the yield.
• A thin, closed market. Once new issuances were stopped, there were very few similar instruments. The NCLT order on the Tata scheme notes that later regulatory changes left a narrow market for such shares, and that the discount had widened since listing.
• Index and fund mandates. Many institutions simply prefer the main line of shares, which tends to concentrate liquidity there.

For a contrarian, that discount looked like an opportunity: same economics, lower price. The catch is that a discount can stay wide for years. It only closes if something forces it to, such as a conversion or a cancellation scheme.

Worked example: DVR vs ordinary share (hypothetical numbers)

All prices below are made up to show the arithmetic. They are not Tata Motors prices or anyone else’s.

Assume a company with a face value of ₹2. The ordinary share trades at ₹500 and its DVR trades at ₹300. Each DVR carries one-tenth of a vote. The board declares a dividend of 100% on ordinary shares, and the DVR gets five percentage points more, so 105%.

A few things jump out. The DVR’s yield is higher, but not because of the extra ten paise. Almost all of it comes from the lower price. And the same ₹1 lakh buys you about a sixth of the voting power. If you never vote and never care about control, the DVR is the cheaper way to own the same profits. That was the whole bull case for low-vote shares.

Now the discount. At ₹300 against ₹500, the DVR trades at a 40% discount. If the company announced it would swap every 10 DVRs for 7 ordinary shares, each DVR would effectively be worth 0.7 of an ordinary share, or ₹350 at the same ordinary price. That is a 30% discount to the ordinary share and roughly a 16.7% gain on the DVR’s ₹300 price. Someone holding 1,000 DVRs would be entitled to 700 ordinary shares, worth ₹3,50,000 at ₹500, against ₹3,00,000 before the announcement.

The DVR discount is not a free lunch. It is a bet that someone, someday, will force the gap shut, and the swap ratio decides how much of it you actually get.

How the Tata Motors DVR ended: the 2024 cancellation

Tata Motors went exactly this route. Its board approved a scheme to cancel the ‘A’ Ordinary shares and issue ordinary shares as consideration. Per the company’s presentation, holders would receive 7 ordinary shares for every 10 ‘A’ shares. Based on 24 July 2023 closing prices, the company said that worked out to a 23% premium to the ‘A’ share price and a 30% discount to the ordinary share price, against the roughly 43% discount then prevailing. It also said share capital would fall by about 4.2%, which it described as EPS accretive, and that post-scheme voting and economic rights would become the same.

The scheme needed approval from both classes of shareholders voting separately, plus SEBI, the exchanges, creditors and the NCLT. The NCLT Mumbai bench sanctioned it by an order dated 2 August 2024. In its Regulation 30 filing, Tata Motors said the scheme became effective on Sunday, 1 September 2024, which was also the record date, and that the entire ‘A’ Ordinary capital of 50,85,02,896 shares of ₹2 each stood cancelled.

The mechanics had a tax wrinkle many retail holders did not expect. The company’s FAQ on the cancellation explains that, under Section 2(22)(d) of the Income Tax Act, the consideration was treated as a deemed dividend to the extent of accumulated profits, set at ₹200.63 per ‘A’ share. A trust set up for the scheme sold part of the new shares to cover withholding tax and then distributed the rest, along with cash for fractions. The FAQ also says the cost of each new ordinary share for tax purposes is ₹1,111.35, the NSE closing price on 30 August 2024.

On 25 September 2024, Tata Motors told the exchanges that the trust had credited 33,58,11,066 new ordinary shares, plus cash for fractional entitlements and surplus sale proceeds, after deducting taxes. That is fewer shares than a straight 7:10 conversion of the cancelled count would produce, which is consistent with the trust having sold shares to pay the tax.

For readers who want the corporate-law side of how such schemes are approved, our explainer on a scheme of arrangement covers the NCLT process.

What DVRs mean for investors now

Since listed companies cannot issue new low-vote DVRs, you are unlikely to be offered one in a fresh issue. But the idea has not gone away. It lives on in two forms:

1. SR shares in tech IPOs. Here the founder holds the extra votes and you buy ordinary shares. The SEBI safeguards, such as the coat-tail provisions that make SR shares vote one-for-one on matters like appointing independent directors or auditors, and the sunset clauses, are the parts worth reading in the offer document. Our piece on dual class shares goes through how that plays out in an IPO.
2. Unlisted company DVRs. Private companies can still use differential rights within the MCA’s 74% voting-power cap. If you invest in a pre-IPO round or an unlisted share, check the articles and the share class you are actually getting.

A short checklist if you hold or evaluate a DVR-type share

• Read the terms of issue: votes per share, dividend formula and any conversion clause.
• Work out the dividend sweetener in rupees, not percentage points, using face value.
• Compare the discount today with its own history rather than with a “fair” number you picked.
• Ask what event could close the gap: a conversion, a merger of classes or a buyback. Without one, the discount can persist.
• If a swap is proposed, compute the implied value from the ratio and think about the tax treatment before celebrating the premium.

For more on how share classes, lock-ins and promoter holdings show up in offer documents, our guide to IPO investing in India is a good next stop.

Disclaimer: This article is for educational purposes only and is not investment, tax or legal advice. The worked example uses hypothetical prices. Company and regulatory details are taken from the linked filings and releases; rules change, so read the latest documents and consult a SEBI-registered investment adviser before investing.