Budget impact: Shares with DVRs underperform after DDT removal

Illustration: Binay Sinha
Shares with differential voting rights (DVRs) have underperformed the broader market after the Budget on February 1.

The median loss for such securities after the Budget is 6.8 per cent, compared to a 1.8 per cent gain in the benchmark S&P BSE Sensex. 

Companies with DVRs include Tata Motors, Future Enterprises, Jain Irrigation Systems, and Stampede Capital. DVRs have also underperformed the ordinary shares of the companies, which are down 3.4 per cent on a median basis. Among key examples, the Jain Irrigation stock was down 2.8 per cent compared with an 8.6 per cent DVR decline. The Tata Motors DVR is down 5.1 per cent compared with a 4 per cent decline in the ordinary share. 

Future Enterprises’ ordinary shares also outperformed the DVR. Ordinary shares rose 2.3 per cent compared to a 0.2 rise for its DVRs. Stampede Capital ordinary shares are down 7.5 per cent while the DVR is down 9.5 per cent. 

DVRs typically come with lower voting rights than regular shares do. But such securities also offer higher dividends to investors. The Budget has suggested that dividends will be taxed in the hands of investors. 

Earlier a flat rate of 20.56 per cent, including cess and surcharge, applied. Companies deducted this dividend distribution tax before paying investors. Investors will now have to pay it at their marginal tax rate. This could be as high as 42.7 per cent for the highest tax bracket. The move comes even after a recent recognition that DVRs can help meet capital needs of many kinds of firms, especially technology companies.

“This is especially relevant for new technology firms which have asset light models, with little or no need for debt financing. These firms, however, continuously require grow only through equity, which dilutes promoter’s/ founder’s stake, thereby diluting control. It is pertinent to note that in such cases, retaining founder’s interest & control in the business is of great value to all shareholders,” said a March 2019 consultation paper on DVRs and their applicability in the Indian context. 

The Securities and Exchange Board of India approved norms for the issue of DVRs in June. 

S Krishnakumar, chief investment officer (equity) at Sundaram Asset Management Company, suggested that taxation might not be the key determinant of how these instruments fare. He said the current phase was a transitory one as people got used to lower post-tax returns. “Companies will have to go in for a little higher dividend so that offsets the taxes (to ensure) the yields are better ...” he said. 

Pankaj Pandey, head of research at brokerage firm ICICI Direct, suggested that company-specific issues could dictate expectations of dividends from firms with DVRs. The instrument may underperform if investors believe that fewer dividends will be forthcoming. He added the taxation aspect could also have a bearing for any high networth individuals (HNIs) who own such securities.

“It is a bit negative for HNIs and promoters with a direct holding,” he said.

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