Shares of Tata Motors DVR (differential voting rights) rallied nearly 18% to hit a fresh 52-week high on Wednesday, a day after Tata Motors announced it will convert its DVR shares into ordinary shares, a move which is being seen as a strategy to simplify its capital structure. The decision to cancel DVR or A-share programme comes 15 years after issuance, when it was first issued in October 2008 to give different voting rights to their shareholders compared to holders of regular equity shares. In January this year, the auto major delisted its American Depository Receipts (ADRs) from the New York Stock Exchange (NYSE), which was listed in the U.S. in 2004.
Post delisting of the ADRs from NYSE, Tata Motors (TML) has currently two types of listed equity securities, namely ordinary shares and ‘A’ ordinary shares. The ‘A’ ordinary shares carry 1/10th of the voting rights of ordinary shares and are entitled to five percentage points higher dividend. The current market value of Tata Motors DVR is ₹21,543 crore, while the market value of ordinary shares is ₹2.15 lakh crore.
In a bid to simplify the capital structure, the board of directors of TML on Tuesday approved the conversion of DVR shares to ordinary shares under which the shareholders of DVRs would receive 7 fully paid-up shares of Tata Motors for every 10 Tata Motors DVRs they held. This will cut the current number of equity shares by 4.2%.
“The rationale behind this exercise is to simplify and consolidate the capital structure of Tata Motors and to keep a single listed entity of TML,” says Kranti Bathini of WealthMills Securities.
Reacting to the news, Tata Motors DVR shares opened sharply higher at ₹439 against the previous closing price of ₹373.1 on the BSE. In the first two hours of trade so far, the stock gained as much as 17.9% to ₹440, while the market capitalisation climbed to ₹21,635 crore. On the volume front, there was a surge in buying as nearly 17 lakh shares changed hands over the counter on the BSE compared with a two-week average of 2.07 lakh stocks. The DVR shares of Tata Motors have risen 132% in the last 9 months, from its 52-week low of ₹189.50 touched on October 12, 2022.
On the NSE, Tata Motors DVR share price rose as much as 16.7% to ₹437 after opening higher at ₹435 against Tuesday’s closing level of ₹374.40.
Meanwhile, Tata Motors shares gained as much as 3% to hit a new 52-week high of ₹665.40 on Wednesday after the automaker reported robust earnings in the June quarter.
How are Tata Motors DVR shares different from ordinary shares?
In 2008, Tata Motors issued a new type of security known as the Differential Voting Rights or DVR shares to repay the loans taken for funding the acquisition of luxury brands Jaguar and Land Rover (JLR). It was the first Indian company to issue those shares in the markets followed by other listed entities such as Gujarat NRE Coke, Future Enterprises, and Jain Irrigation.
DVR shares are designed to give higher dividends to owners as a form of compensation for their lower voting rights compared to holders of ordinary equity shares. The price of DVR shares is lower compared to ordinary shares, as they are often extended at discounts. Adding to it, since DVRs are offered at a discount, the higher dividend payout makes the DVR a lot more attractive in terms of dividend yields.
Will Tata Motors DVR delisting unlock value for shareholders?
The share swap ratio for converting DVR shares into ordinary shares has been fixed at 7 ordinary shares for every 10 DVRs held, implying around a 23% premium to the existing DVR market price.
This will help Tata Motors reduce the equity base by 4.2% without impacting its net debt as it would still get the DVR shares at a discount to ordinary shares, even after paying the 23% premium, says ICICI Securities in a report. The brokerage says the process may take 12-15 months and will be subject to tax treatment for the capital gains for shareholders on the back of this deal.
According to Axis Capital, the scheme of arrangement for a capital reduction of the ‘A’ ordinary shares would translate to a 23% premium to the DVR shareholders. This will result in a 4.2% reduction in the number of outstanding equity shares, making it value accretive for all shareholders, it says.
“The termination of the ADS program along with the proposed scheme of capital reduction of ‘A’ Ordinary shares will simplify and consolidate all traded equity securities of Tata Motors into Ordinary Shares listed only on NSE and BSE,” it adds.
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