Tata Motors Ltd.'s decision to extinguish its listed differential voting rights or DVR shares will have three major tax implications for investors.
The company will cancel DVR shares, listed since 2008, by issuing ordinary shares. The automaker will issue seven ordinary shares of Tata Motors for every 10 DVRs held by investors. That's about a 23% premium over the DVRs' pre-closing price and a 30% discount over ordinary shares.
Tax Implications
PB Balaji, chief financial officer at Tata Motors, said in an interview with BQ Prime that cancelling the DVR shares will have three tax implications:
The delisting constitutes capital reduction, having the same implications as a liquidation. When the shares are delisted in 12-15 months, all accumulated profits on the balance sheet at that given point will be considered deemed dividend to current DVR shareholders. As a result, the deemed dividend would have tax consequences (withholding tax).
Different persons purchasing DVR shares at different times result in different cost bases. Long-term capital gains from these transactions will be taxed.
The cancellation requires the company to establish a new trust to accept and sell company shares. Any short-term capital gains earned during the period would also be taxed.
Once the capital restructuring is completed, Tata Motor's equity capital will be reduced by approximately 4%, Balaji said. DVR cancellation would increase earnings per share for all shareholders and increase ordinary share liquidity in the market by 18%. Tata Motors' overall market capitalisation was lowered because DVR shares trade at a discount to ordinary shares. As a result of this corporate action, the company's total market share would also increase, Balaji said.
Ordinary shares of the company were trading 1.20% higher at Rs 647.2 apiece and DVRs were 12.7% higher at Rs 421.60 at 1:32 p.m. compared to a 0.61% advance in the Nifty 50.
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