Tata Motors DVR are up 18%
Shares of Tata Motors DVR increased by around 18% on the BSE to reach their new 52-week high of 440 after the conversion of Tata Motors DVR shares was announced the previous day, on Wednesday, July 26. The ordinary shares are affected by this change.
Tata Motors DVR shares to be canceled: Tata Motors is converting its DVR shares into ordinary shares.
As per Mint’s report, Tata Motors declared on Tuesday (July 25) along with its results that, subject to the effective implementation of the plan, the company will issue 7 new fully-paid ordinary shares of ₹2 each for every 10 DVR shares. These new ordinary shares will be listed only on NSE and BSE, consolidating all American Depository Shares (ADS) with the existing ordinary shares.
What are DVR shares?
DVR stands for Differential Voting Rights, which means these shares grant different voting rights to shareholders compared to regular equity shares. In the case of a company’s regular shares, investors receive one voting right per share. This means that each shareholder has one vote for each share they hold. However, depending on the company’s structure, DVR shares may offer more or fewer voting rights compared to regular shares.
In the case of High-Differential Voting Rights, shareholders have more voting rights compared to regular shareholders, whereas in the case of Low-Differential Voting Rights (DVR), shareholders have fewer voting rights compared to regular shares. According to experts, DVR shares usually offer 1/10th of the voting rights of regular shares but receive a premium of around 5% on the dividend.
What does the conversion of DVR shares into Tata Motors shares mean?
Firstly, the conversion of DVR shares will result in a 4.2% decrease in the number of outstanding equity shares, which will be value accretive for all shareholders.
Brokerage firm Nirmal Bang indicated that the proposed capital reduction implies a premium of 23% to the value of ‘A’ ordinary shares. Consequently, the number of outstanding equity shares will decrease by 4.2%, benefitting all shareholders in terms of Earnings Per Share (EPS) contribution.
Aditya Gaggar, Director of Progressive Shares, highlighted that DVR shares were first introduced by Tata Motors in the Indian markets in 2008. Regulatory changes have since prohibited the issuance of such instruments, making Tata Motors the only company listed on corporate actions.
The DVR shares have a 5% higher dividend right but only 1/10th the voting power of regular shares. In addition to maintaining flexibility and values, the capital reduction streamlines the company’s financial structure, according to Gaggar. All shareholders will benefit from the 4.2% decrease in the number of outstanding equity shares.
Gaggar also revealed that upon completion, the effective voting rights of promoters and promoter groups will decrease by 3.16%. DVR holders will receive seven ordinary shares (with a face value of ₹2) for every ten DVR shares, translating to a 23% premium on the closing of DVR shares and a 30% discount. Tata Motors ordinary shares.
The net debt won’t be affected by this effective buyback because there isn’t any cash spent, he continued. It is anticipated that the entire process would be finished in 12 to 15 months.
How will this affect Tata Motors and its DVR shareholders?
Kotak Institutional Equities remarked that there would be no cash outlay for Tata Motors, and therefore, there will be no impact on its debt levels.
“With the delisting of DVRs (at the beginning of this year), the above actions will streamline and consolidate Tata Motors’ equity shares. Tax on distributed income and tax on redemption for DVRs will be stopped. The company will set up an independent trust to manage redemptions and will sell ordinary shares for compensation and cash will be deposited into the accounts of cash shareholders for fractional entitlement,” Kotak stated.”
According to Manish Chowdhury, Head of Research at StoxBox, the proposed scheme will boost liquidity by streamlining and consolidating all Tata Motors equity securities traded on the BSE and NSE.
The entire exercise would profit accretive for shareholders because the planned reorganization of shares will lead to a decrease in equity shares outstanding, according to Chowdhury.