There is a new class of equities in town—non-voting shares.
Tata Motors had said last week that it would issue a special class of shares with fewer voting rights. Ten shares will give an investor one voting right. The automobile company will float these shares because it wants to raise money to fund the purchase of the Jaguar and Land Rover deals, which have been temporarily bought with the help of short-term loans. A regular issue of new shares would bring down the stake that the Tata group has in the company and, perhaps,?make?it a takeover target.
Non-voting shares are a neat way to fund corporate ambition without putting control at risk. But, a lot depends on how they are structured. Investment bankers say that investors will be quite happy to lap up these shares. The ordinary investor is not too interested in voting anyway.
(Illustration by: Jayachandran / Mint)
That may be true. But investors are being asked to give up an important right and will have to be compensated. Companies in most developed markets offer non-voting shares at prices that are around one-fifth lower than those of ordinary shares. That improves the dividend yield that investors earn on their capital.
The problem is that India has very low dividend yield, which is the dividend paid on every share divided by the market price of that share. Take Tata Motors. Its share traded at Rs580 on Friday and will pay a dividend of Rs15 per share this year. That gives us a dividend yield of 2.6%. Let’s assume that Tata Motors issues its non-voting shares at a 20% discount, or at Rs464. The dividend yield on this class of shares will then be 3.2%. That’s far lower than what even a bank fixed deposit will pay.
It would not be an exaggeration to say that Indian investors buy shares for capital gains rather than dividends. Non-voting shares will have to be listed separately and will have different trading patterns. We wonder whether they will be liquid since small investors, rather than institutional investors, are likely to buy and sell them. So, the opportunities for capital appreciation may not be as good as those in regular shares with voting rights.
These are not insurmountable problems. But problems they are. It is not hard to see why promoters are excited and investment bankers are cheering the coming of non-voting shares. But we suspect Indian investors will need some more sweeteners before they bite.
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