Tata Motors DVR spikes on conversion to ordinary shares but premium shrinks

The proposed scheme to cancel DVR shares will lead to a reduction in the outstanding equity shares by 4.2 percent, making it value accretive for all shareholders, the company said

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Tata Motors DVR share price gained over 13 percent on July 26, a day after the automobile major’s board approved cancellation of all differential voting rights (DVRs) and replacing them with ordinary shares.

Under the scheme of arrangement, the company will issue seven fully paid-up ordinary shares of face value Rs 2 each, for every 10 DVRs. As of last closing price (Rs 4,476.15 for seven ordinary shares and Rs 3,800 for 10 DVRs), the spread available was 20 percent in favour of DVR holders.

However, the spread quickly narrowed as the stock opened gap-up on July 26. At 9:20am, Tata Motors DVR was quoting at Rs 423.55 on the NSE, higher by 13 percent from the previous close. The spread is now only 8 percent in favour of DVR holders. Regular shares of Tata Motors traded at Rs 654 at that time.

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According to analysts, an ideal spread to set up a fresh position should be 15 percent. “If in the near term, the spread trades around 8-10 percent, then the existing share spread holders should unwind their position,” Abhilash Pagaria, Head, Nuvama Alternative & Quantitative Research, said.

The DVR stock has seen a large trade of 7.06 lakh shares (1.38 percent equity) worth Rs 31.7 crore change hands. Major shareholders in Tata Motors DVR include ICICI Prudential AMC, Vanguard Emerging Market Stock Index, Rekha Rakesh Jhunjhunwala, Government of Singapore and Post Office Life Insurance Fund.

DVRs carry one-tenth of voting rights of ordinary shares and are entitled to 5 percentage points higher dividend. These shares were first issued by Tata Motors in 2008 and subsequently in a further QIP in 2010 and rights issue in 2015.

The proposed scheme to cancel DVR shares will lead to a reduction in the outstanding equity shares by 4.2 percent, making it value accretive for all shareholders, the company said.

The process is expected to take 12-15 months and would be subject to tax treatment for the capital gains for shareholders on back of this deal, the management clarified in a concall.

PWC is the independent registered valuer for the transaction, 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.

In other news, Tata Motors has posted a consolidated net profit of Rs 3,203 crore for the June quarter, boosted by the improved margin of its passenger vehicle (PV) business and robust sales at its luxury car unit, Jaguar Land Rover (JLR). The automobile manufacturing company had reported a net loss of Rs 5,006.60 crore in Q1 FY23 on revenues of Rs 71,934.66 crore.

Revenue from operations increased 42 percent to Rs 1.02 lakh crore in the June quarter. Earnings before interest, taxes, depreciation, and amortization (EBITDA) for the quarter stood at Rs 14,700 crore, up 177 percent.

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