Last Updated on September 27, 2023 by BFSLTeam BFSLTeam
Contrary to popular opinion, a company may choose to issue more than one class of equity shares. The issuance of two different classes of common stock is very prevalent in the U.S. stock market. Of late, the Indian stock market has also started to witness quite a few companies issuing more than one class of equity shares. As an investor, it is important to understand what dual-class shares are and their various advantages and disadvantages.
Table of Content
When a company issues two different classes of equity shares, each with its own set of rights and benefits, it is said to have issued dual-class shares. Typically, in a dual-class share structure, one class offers voting rights and dividend entitlement, whereas the other class often has limited or no voting power or doesn’t provide dividends. However, the company issuing dual-class shares has the freedom to decide the rights that shareholders of each class are entitled to.
Tata Motors Limited is a good example of dual class shares in India. The company offers two different types of equity shares – regular shares and differential voting rights (DVR) shares. The regular equity shares of Tata Motors give its shareholders the right to vote (at one vote for every equity share) and the right to claim dividends.
The differential voting rights shares, on the other hand, offer limited voting rights to the holders (one vote for every 10 equity shares). However, it provides a 5% additional dividend over and above the dividend that regular equity shareholders are entitled to receive.
Another major point to note is the price of DVR shares. In the case of Tata Motors DVR shares, the price at which they trade is lower than that of the regular shares. This is due to the limited voting rights of its shareholders.
Additional Read: What are Voting Shares?
A company gets to enjoy several benefits by issuing dual-class shares. Here’s a quick overview of some of the key advantages.
- By issuing a second class of shares with differential voting rights, promoters, founders and other initial investors can continue to retain control of the company.
- The company can raise capital without diluting the ownership of existing shareholders.
- Dual-class shares can protect a company from hostile takeover bids from outsiders, especially if one class of shares are exclusively held by the promoters and not listed on the exchanges.
- Companies can complete mergers and acquisitions without any negative impact on their existing shareholders.
On the contrary, issuing dual-class shares also has its fair share of drawbacks. Let’s look at a few of the most important disadvantages.
- Issuing dual-class shares automatically puts the shareholders of one equity share class at a disadvantage by limiting their voting power.
- Dual-class shares can lead to unequal distribution of risk.
- It might lead to excessive control in the hands of a limited number of shareholders (usually promoters or founders).
Also Read: What is a Share Class?
In the U.S. stock market, there are many instances where companies have issued more than two classes of equity shares. Alphabet Inc., the parent holding company of Google, is a good example of a company with more than two common stock classes. As a matter of fact, Alphabet Inc. has three classes of equity shares – Class A, Class B and Class C. Out of these three, Class A and Class C are issued to the general public and listed on NASDAQ, whereas Class B shares are held only by its founders and top executives and are not listed on the exchange. Also, Class B shares have more voting power than both Class A and Class C shares.
In the context of the Indian stock market, however, there currently isn’t any company that has issued more than dual-class shares in India despite there being no restrictions whatsoever.
Conclusion
Although dual-class shares allow the company to raise capital with minimal dilution in ownership, it is ultimately disadvantageous to the investors since it curtails their voting power. If you’re planning to invest in dual-class shares in India, make sure to thoroughly analyse the terms and limitations before investing.
