Tata Motors Ltd.'s Differential Voting Rights shares, one of the most popular instruments in the Indian markets, will soon be history.
The DVRs of Tata Motors, known as 'A' Ordinary shares, will be cancelled.
Holders of the DVR will get seven ordinary shares for every 10 DVRs held. This works out to a premium of 23% over the previous day’s close of the DVR shares and a 30% discount to the Tata Motors ordinary shares.
This is a big deal for the holders of DVRs and ordinary shares. Effectively, it is a buyback without spending a rupee. This exercise will reduce the total capital by 4% and, as the company states, have "no cash outgo and therefore no impact on the net debt".
DVRs were introduced back in 2008, which ruffled the feathers of capital market regulators. It was a first for the Indian market, and Tata Motors is the only one to issue it. It was called `A’ Ordinary shares as the market regulator disallowed the issuance of differential voting rights but allowed the `A’ shares to continue.
The latest move to cancel these shares is yet another master stroke from Tata Motors. The entire exercise will take 12–15 months to complete.
Investors were attracted by the special additional dividend of 5% and the discount to the basic ordinary shares. Anyone owning the DVR was as good as owning ordinary shares.
The discount was initially around 10%, but over the years, it has been steady in the range of about 40%.
What Happens Next?
Upon completion of the restructuring of the shareholding and scheme, the effective voting rights of the promoter and promoter group will be reduced by 3.16%, the company said in a disclosure to the stock exchanges.
The Tata Motors DVR is trading at a 41.6% discount to ordinary shares on the stock exchanges. This has the effect of significantly understating the company’s market capitalisation, the company said.
It also contributes to a complex capital structure and increases the administrative complexity of maintaining two classes of shares, it said.
The reorganisation of share capital will simplify and consolidate the company’s capital structure and preserve liquidity, in addition to being value-accretive and beneficial for all shareholders, the company said in a statement.
The scheme would require the approval of the stock exchanges, the Securities and Exchange Board of India, 75% of DVR holders, the majority of minority shareholders, creditors, and the National Company Law Tribunal.
Performance Of DVR Shares
The DVR shares have gained nearly 82% year-to-date, as compared with a 64.83% rise in ordinary shares of Tata Motors.
In the last year, DVR shares rose 66.4% in comparison with ordinary shares, which gained 40.5%.
Major DVR Holders
Among institutional holders of DVR, ICICI Prudential Equity and Debt Fund held a 19.35% stake as of June this year.
While 32% of the stake was held by domestic institutions, foreign portfolio investors held 18.6%.
Retail shareholders with nominal share capital up to Rs 2 lakh held a 24.23% stake.
Tax Implication
Cancellation of DVR shares is taxable in the hands of shareholders. The withholding tax will be settled by the Trust by selling the requisite ordinary shares and the net ordinary shares. However, cash for fractional entitlement will be credited to the holder’s account.
For non-resident holders, withholding tax on capital gains on the issue of ordinary shares will also be levied.
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