Promoters paring stake seen positive for Tata Motors' DVR

Tata Sons and other promoter group firms have brought down their holding in Tata Motors DVR to 0.72% from 84.27% at the time of its issuance in late 2008. While the move signifies acceptance of company’s differential voting rights (DVR) shares by investors, the current discount of about 49% over the ordinary shares has given shareholders hope for an upside.

Tata Motors DVR shares closed at Rs 187.7 a share on the BSE on Monday, while the Tata Motors stock closed at Rs 366.85. India’s largest truck maker raised Rs 4,200 crore in two simultaneous and unlinked issue of ordinary and DVR shares through a Rights Issue in late 2008. The DVR shares were offered at Rs 305 a share, about 10% discount to Rs 340 per share for ordinary share price. Promoters had to bail out the DVR issuance amidst the financial meltdown of 2008.

“DVR by its very nature is not an instrument for a promoter because of the voting rights being very low,” says V Jayasankar, senior executive director and head equity capital market, at home-grown investment bank Kotak Mahindra Capital. The DVR shares came at one-tenth voting rights to the ordinary shares hence it was not really attractive for promoters who value voting rights for control over management. But it was attractive to other investors as it came with 500 basis points higher dividend to the ordinary share.

CHANGING TACK

• The move signifies acceptance of company’s DVR shares by the investors. The current discount of about 49 per cent over the ordinary shares has given shareholders hope for an upside
• DVR is still a new instrument in India and has not yet got huge traction from retail investors

Besides DVR’s price appreciation is expected to be in tandem with the underlying ordinary shares. So there was a overhang of the promoters selling down and that kept the DVR discount a bit too high. Eventually the promoters brought down their holding in DVR to a 52% in March 2010, to 18.9% a year later and again followed with a 3.86% in March 20012. Finally it brought it down to 0.88% in March 2013 and 0.72% in September 2013. The company also split its shares on 12 September 2011 with bringing down the face value to Rs 2 from Rs 10 earlier.

So, by the time promoters brought down their holding the overhang should have been removed and discount should have come down. But that has not happened. The company also split its shares on 12 September 2011 with bringing down the face value to Rs  2 from Rs 10 earlier.

“We expect 55% upside in the DVRs – the discount should narrow as, risk appetite in the market improves. Usually the DVR discount narrows when mid-cap stocks rally and because liquidity is better,” said Binay Singh, analyst with international brokerage Morgan Stanley.

DVR is still a new instrument in India and has not yet got huge traction from retail investors. Kishore Biyani-promoted Future Retail had to increase its stake in its DVR to 53.61% by September 2013 from a 46.5% in March 2009.