Tata Motors has seen a surge in its Differential Voting Rights (DVR) shares after announcing its plans to convert them to ordinary shares. The DVR share prices surged almost 18% to reach a 52-week high of ₹440 on the Bombay Stock Exchange (BSE) on July 26.
Tata Motors, on July 25, revealed a Scheme of Arrangement for the cancellation of ‘A’ Ordinary Shares, also known as DVR shares, and the issuance of seven ordinary shares for every 10 DVR shares held by shareholders. DVR shares are a type of share that provides shareholders with fewer voting rights compared to regular equity shares but with higher dividends. In the case of Tata Motors, the DVR shares carry 1/10th of the voting rights of ordinary shares and entitle holders to a 5% higher dividend.
The conversion of these shares, which were first issued in 2008, will lead to a 4.2% reduction in the number of outstanding equity shares, making the scheme beneficial to all shareholders. The conversion is seen as value-accretive, as it comes with a 23% premium over the previous day’s closing share price for the DVR shares, which is a 30% discount over the ordinary share price.
As per Aditya Gaggar, Director of Progressive Shares, “The re-organisation of share capital will simplify and consolidate the company’s capital structure and preserve liquidity.” Upon completion, the effective voting rights of the promoter and promoter group will be reduced by 3.16%.
Manish Chowdhury, Head of Research at StoxBox, adds that the proposed scheme will simplify, consolidate, and increase liquidity of all traded equity securities of Tata Motors on the BSE and NSE. As the reorganization will result in a reduction in equity shares outstanding, the exercise will be earnings accretive for shareholders.
The scheme envisages the creation of a Trust, with an independent third party as a Trustee, to operationalize the various actions required for the scheme to comply with applicable laws. The trust will receive the ordinary shares issued by Tata Motors to the DVR holders and will then distribute these shares according to the current shareholding in Tata Motors DVR.
This scheme is subject to regulatory and shareholder approvals. The independent registered valuer for the transaction is PWC, with Citigroup and Axis Capital acting as fairness opinion providers for the DVR and ordinary shareholders respectively. Cyril Amarchand Mangaldas is the legal advisor to Tata Motors for the transaction.
The conversion is anticipated to be completed within a 12-15 month period.
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