Tata Motors to convert differential voting rights into ordinary shares

Tata Motors announced on Tuesday the termination of its differential voting rights (DVR) or A-share programme, bringing the curtains down on an innovative fundraising instrument that failed to take off on Dalal Street.

The board of the automotive major has approved a scheme whereby seven ordinary shares of the company will be issued for every 10 A-shares held, and all its outstanding A-shares will stand cancelled.

The proposal, subject to shareholders’ approval, is aimed at simplification and consolidation of its capital structure. Earlier this year, Tata Motors delisted its American depositary shares listed on the New York Stock Exchange.

The DVRs carry only a tenth of the voting rights of the ordinary shares but are entitled to receive five percentage points higher dividend. However, given Tata Motors’ low dividend payment history, the DVRs always traded at a substantial discount to ordinary shares.

On Tuesday, the ordinary shares of Tata Motors closed at Rs 639, up 1.6 per cent, while the DVR ended at Rs 373, up 4.3 per cent.

“The ‘A’ ordinary shares currently trade at about a 43 per cent discount to the ordinary shares. The capital reduction consideration implies a 23 per cent premium on the previous day’s closing share price of ‘A’ ordinary shares, translating into a 30 per cent discount over the ordinary share price and significantly below its historical averages. The scheme will lead to a reduction in the outstanding equity shares by 4.2 per cent, making it value-accretive for all shareholders,” said Tata Motors in a press release.

According to the latest share prices and swap ratio, the DVR is available at a 20 per cent discount to the ordinary shares. Analysts said the spread could narrow further as savvy investors will look to cash in on the arbitrage gains. The gains won’t be realised immediately as the completion of the capital reduction scheme could take up to a year, said an analyst.

The market value of outstanding Tata Motors DVR is nearly Rs 19,000 crore, while the market value of ordinary shares is Rs 2.12 trillion.

The A-share programme is fairly common in the US; however, Tata Motors was the first Indian company to experiment with the instrument in the domestic market in 2008. Future Enterprises and Jain Irrigation Systems were some other companies that had issued a DVR.

P B Balaji, Group chief financial officer of Tata Motors, said in a media call on Tuesday, “We are among a few companies that have DVR shares, and this instrument lost its charm in 2010 when the regulator expressed concerns on its use. Since then, it has only been used by start-ups. We have tried to infuse liquidity into it through qualified institutional placement, rights issues, etc. Even then, the discount has averaged at about 48 per cent.”

He added that multiple DVR holders have raised concerns around this issue, and even after declaring a dividend, the discounts continued.

“We need to be fair to the shareholders too — the original discount, which started at 10 per cent, went all the way up to 50 per cent. So, at 30 per cent, we have gone midway,” he added.

Subsequent regulatory changes have since restricted the further issuance of such instruments. At present, Tata Motors remains the only large listed corporation with such an instrument.

Tata Motors has appointed PWC as an independent registered valuer for the transaction. Citigroup and Axis Capital will act as fairness opinion providers for the ‘A’ and ordinary shareholders, respectively. Cyril Amarchand Mangaldas is the legal advisor to Tata Motors for the transaction.