Shares with Differential Voting Rights

NSE Quarterly Briefing, No. 28, May 2020

7 Pages Posted: 4 Jun 2020

See all articles by Bala N. Balasubramanian

Bala N. Balasubramanian

Indian Institute of Management Ahmedabad; Formerly IIM Bangalore - Centre for Corporate Governance and Citizensip; Indian Institute of Management Ahmedabad

Date Written: May 7, 2020

Abstract

Among the most controversial in the history of corporate control, shares with differential voting rights (DVRs), also known as Dual Class Shares, have been the subject of furious but inconclusive debates as to their acceptability as a legitimate device to perpetuate control of a corporation without necessarily having a controlling percentage of equal-rights-equity. Institutional investors around the world are violently against the principle on grounds that it is inequitable, unethical, and unfair to the rest of the shareholders of equal-rights-equity where cash flow rights and control rights are proportionate to their equity holding. Advocates of DVRs argue it is not unfair that a promoting shareholder (if he or she is professional or technologist starting up a new venture with little monetary investment) should have the right to continue to control and reap the benefits of his or her innovations or ideas, should they prove successful and the entity grows in size, needing more funds which the promoting individual is not able to proportionately contribute. In this later case, the related question is for how long? Shouldn't there be a sunset condition that would gradually remove the differential treatment? And also, wouldn't continued entrenchment foster complacency over time and lead to diminishing performance, to the detriment of other shareholders?

In the interests of improving ease of doing business in India, regulations allowing and even promoting DVRs have recently been tweaked by the government. Would there be many takers, especially given the uncomplimentary signalling effect of such issues? Time alone will tell.

Suggested Citation

Balasubramanian, Bala N., Shares with Differential Voting Rights (May 7, 2020). NSE Quarterly Briefing, No. 28, May 2020, Available at SSRN: https://ssrn.com/abstract=3595316

Bala N. Balasubramanian (Contact Author)

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat
India
+919167036140 (Phone)

Formerly IIM Bangalore - Centre for Corporate Governance and Citizensip ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat
India
+919167036140 (Phone)

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