In a significant move aimed at simplifying its capital structure, Tata Motors, one of India’s leading automakers, has decided to cancel its Differential Voting Rights (DVRs) 15 years after their issuance. This decision has implications for shareholders, particularly those holding DVRs.

What Are DVRs and How Are They Different From Ordinary Shares?

DVRs are a unique type of share that provide different voting and dividend rights compared to ordinary shares. Tata Motors’ DVRs carry a tenth of the voting rights of ordinary shares but are entitled to a five percentage point higher dividend payout. Interestingly, DVRs trade at almost half the price of ordinary shares, providing arbitrage opportunities for investors.

The public, including some notable investors, holds the majority of Tata Motors DVRs. Mutual funds hold a 28.82% stake in Tata Motors DVRs, with ICICI Prudential holding the highest at 19.35%. Foreign portfolio investors, who collectively hold 18.6%, include Franklin Templeton, the Government of Singapore, and Vanguard.

What Does DVR Cancellation Means For Shareholders?

Under the proposed scheme of the arrangement, DVR holders will receive seven fully paid-up ordinary shares of the company for every 10 DVRs they hold. This implies a 23% premium on the previous day's closing price of DVRs, translating to a 30% discount over the ordinary share price. The scheme will lead to a reduction in the outstanding equity shares by 4.2%, making it value accretive for all shareholders.

Tata Motors will create a Trust, which will receive the new ordinary shares from the company on behalf and for the benefit of each of the relevant shareholders. The DVRs currently trade at about a 43% discount to ordinary shares. As traders saw an arbitrage opportunity, Tata Motors DVR shares jumped 18% to the day’s high at ₹440.

The company will require approvals from the capital market regulator SEBI, creditors, stakeholders, and the NCLT for replacing the DVRs with ordinary shares.

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