Dual Class Shares: What Are These?

Some of the companies in India as well as abroad resort to issuing two types of shares one with higher voting rights and the other with limited rights. This is to retain management control by the promoter of the company and giving less to other stakeholders.

Dual Class Shares: What Are These?

Some of the positives of this share structure system as envisaged include

1. Helps strengthen corporate governance as against weakening it

2. Also, transparency is rendered when it comes to insider control and one is able to make companies in which absolute control lies with the insiders.

And now in such a case, the outsiders now need to undergo due-diligence before betting on shares of such a company with dual share structure.

So, in all while retaining control, promoter is able to offer limited voice to outside stakeholders.

In dual class share structure, typically asset light companies i.e. mainly technology companies can look to borrow outside equity without putting much of pressure on the internal control of the firm. As in its absence, the firm shall be forced to depend heavily on one's own cash that can be in the form of retained earnings. This can also implying pressure to produce profits at any early stage or compromise growth rate at par with the rate of generation of cash at the firm.

The India context-DVRs

In the Indian context, in order to dilute stake in the company and simultaneously raise capital, DVRs or differential voting right shares are issued. Few of the Indian companies are following the route and are less popular as they trade at a discount in comparison to full voting right shares. The shareholders with these shares have a varying degree of voting right in contrast to usual shares.

It is worth mentioning that if such share structure worsens governance, in such a case outside shareholders will refuse to invest in shares of such companies. Thus the appeal of these shares shall be all the more reduced.

The concept of dual class shares has worked well in the US market and recently introduced in Asian equity markets via Singapore- and Hong Kong- based stock exchanges.

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