Tata Motors DVR: What it means for you and the company.

In recent news, Tata Motors Group has decided to cancel their class ‘A’ ordinary shares. Sounds confusing?😵‍💫 Do not worry, I will explain what it means in this article. From what ‘A’ ordinary share is to how this act would affect the company's business to what it implies for the shareholders, everything is covered.

First things first, let us understand what ‘A’ ordinary share, sometimes referred to as DVR (Differential Voting Rights) share means.

It is a special kind of share that gives its owners different voting rights from those of ordinary shares in general. In simple terms, it permits some shareholders to hold fewer voting rights than others, despite the fact that they can have the same financial stake in the company.

Now, let's address some key questions to comprehend the situation better:

1. What is the difference between Ordinary shares and DVRs❓
2. Why is DVR not a good option for Indian investors❓
3. Why do companies issue DVRs❓

Click here to get the answers to the above-mentioned questions, read the basics and come back to better understand what follows.

Let us read a little about…

Rights of holders of ‘A’ Ordinary Shares

Let's take a closer look at the rights of the holders of 'A' Ordinary Shares:

1. Dividend Advantage: When it comes to dividends, as a compensation for owning these unique shares, the shareholders get a little bonus. In this case, they received a 5% higher dividend than the regular shareholders' total dividend declared for each fiscal year. 

2. Attending Meetings: Just like normal shareholders, DVR shareholders have the right to go to general and class meetings. They can take part in discussions and vote on future business decisions.

3. Voting Power: Each 'A' Ordinary Shareholder is given one vote for every ten of their shares when voting is necessary at any meeting. Any votes cast in fractions are ignored, so don't worry about the math. Simply,

Ordinary shareholders = 1 voting right ‘A’ Ordinary shareholders = 1/10th voting right

4. Non-Convertible Shares: 'A' Ordinary Shares are not convertible at any time into Ordinary Shares. They continue to exist as distinct entities and offer their owners particular advantages.

5. Limited Percentage: The number of 'A' Ordinary Shares in the company cannot exceed 25% of the total issued Ordinary Share Capital, including 'A' Ordinary Shares. This maintains a balance between various stakeholder classes.

Now that we are aware about the rights that the DVR shareholders enjoy, allow me to walk you through,

The reason for introducing DVR

Tata Motors adopted a unique approach by offering two types of equity shares: Ordinary Shares and 'A' Ordinary Shares. This strategic move allowed them to raise capital while retaining control in the hands of a selected group of shareholders. 

But how did they do it? 

In 2008, Tata Motors issued 'A' Ordinary shares at a 10% discount compared to the prevailing price of the Ordinary Shares. These "A" Ordinary Shares have a reduced voting rights of 10% but 5% greater dividends. 

The market for new issuances was impacted in 2009 when SEBI prohibited businesses from establishing new classes of shares with discriminatory rights. However, the current 'A' ordinary shares were permitted to remain.

In 2010 and 2015, Tata Motors issued additional shares via a Qualified Institutional Placement and a Rights Issue in an effort to increase liquidity and they were successful in doing so.

Interestingly, 'A' Ordinary Shares were also included in the Index and Futures and Options segment, further boosting their liquidity. Despite these efforts, there remains a notable price gap between the Ordinary Shares and 'A' Ordinary Shares, as seen in the table below:

Time Period	On issuance	2010-2023	Last 10 years	Last 5 years	Last 3 years
Discount in the price (in % terms)	10%	43.10%	45.10%	52.20%	52.20%

Now that you know why DVRs are necessary and the advantages they offer, let's go into more detail about the scheme.

About the proposed scheme

On July 25, 2023, Tata Motors' Board approved a scheme of arrangement for a significant change. They intend to issue new ordinary shares in exchange for the existing class 'A' ordinary shares. 

For every 10 'A' Ordinary shares held, the shareholders will receive 7 new ordinary shares. 

To handle this transition smoothly, Tata Motors will set up a trust managed by an independent trustee. The role of the trust will be to receive all the ordinary shares that are being issued to the ‘A’ ordinary shareholders. In order to realise the cash and pay the withholding tax liabilities , the trust will then appoint a Merchant Banker to sell such shares in the market through a block deal. The remaining shares, on a net basis, will be credited to the demat account of the ‘A’ ordinary shareholders. 

So, to put it simply, Tata Motors is managing the shares through a trust and then will sell some to pay taxes before distributing the remaining shares to its ‘A’ ordinary shareholders. Refer the image below to get a better idea about the process ⬇️

Due to the necessity for regulatory approvals from SEBI, stock exchanges, and NCLT, the entire procedure may take 12 to 15 months to complete. Tata Motors must receive consent from the ordinary and class 'A' ordinary shareholders separately in order to proceed with the strategy. Since even the company's promoters, Tata Sons, hold some ‘A’ Ordinary shares, they will also receive the new shares.

Concerning the creditors, don't worry; since it's a non-cash transaction, getting their consent shouldn't be a problem to the company. 

For more on SEBI's role, check out SEBI Regulating Unlisted Companies. Also, learn why companies seek stock exchange listings in Why Do Companies Want to Be Listed.

Impact of the cancellation of DVR on Tata Motors business

Tata Motors' cancellation of the DVR shares will benefit the firm and its stockholders in a number of ways.

The total capital base will initially decrease by ₹15.3 crore, translating into a rise in value or earnings per share (EPS) of 4.2% for all shareholders. This decrease in share capital increases EPS for all shareholders.

Additionally, removing the price differential between Ordinary and ‘A’ Ordinary shares will increase the market value overall by nearly ₹15,000 crore. For shareholders, this is fantastic news because it increases the company's overall value.

The best thing is that Tata Motors won't have to spend any money, which has no impact on net debt for the business. At the beginning of the year, Tata Motors’ ADSs (American Depositary Shares) were delisted from the New York Stock Exchange and now the DVR shares. These moves are to simplify the organization's financial reporting requirements cut administrative expenses and encourage trading of Tata Motors' equity shares on NSE and BSE in India.

Following the scheme's implementation, shareholders' economic and voting rights will be equal. The promoter's voting rights will be reduced by 3.2%, while the voting rights of the public shareholders will grow by 3%.

Now, let's talk about the benefits:

1. For "A" ordinary Shareholders 

DVR shares have typically sold at substantial discounts. Check the graph below to get an idea about the price trends for both Tata Motors ordinary share and DVR.

However, compared to past trends, the suggested 30% discount for the Capital Reduction Ratio is substantially superior, meaning that the Tata Motors DVR shares' reduced value would be paid to shareholders at a price equal to 30% less than the shares' initial nominal value. The discount offered aims to make the shares more attractive to investors and improve the liquidity of the company's ordinary shares. It is an effort to promote increased trading and investment in Tata Motors shares.

This action will improve the liquidity of ordinary shares, enabling investors to participate in Tata Motors' success while also profiting from the business' potential growth.

2. For Ordinary Shareholders

The EPS will increase by approximately 4%, and their economic rights will remain unaffected. The portion of a company's outstanding shares that are available for trading on the open market will increase by 18%, leading to greater liquidity. Additionally, the voting rights of public shareholders will rise by 3.2%.

3. For Tata Motors

The capital structure will be simplified, making the trading of ordinary shares easier. The company's market capitalization will rise if the discount on ‘A’ Ordinary shares is eliminated. This deal will also be cash-neutral, which means that it won't change the net debt.

Tata Motors will be responsible for some costs, such as the scheme's stamp duty, the initial corpus for settling the trust, legal fees, and advising fees, but these are essential to the successful execution of the strategy. As per the news that came out on the 9th of August, N Chandrasekaran, the chairman said that the company will have to bear a cost of ₹100 crore, which will primarily be due to the stamp duty.

Let us quickly compare the performance of the Ordinary Shares and the ‘A’ ordinary shares.

Tata Motors shares at discount?

We saw the price trend above in the graph which clearly indicates Tata Motors DVR trading at a discount compared to Tata Motors ordinary shares, but is that actually a discount? Let us understand this better with an example.

On the date of announcement, 25th July 2023 the closing price of 
Tata Motors was at ₹639.45 and Tata Motors DVR was at ₹374.40
Considering that for every 10 shares of Tata Motor DVR, shareholders will get 7 shares of Tata Motors, the simple math goes as:

Tata Motors = ₹639.45*7 = ₹4476.15 Tata Motors DVR = ₹374.40*10 = ₹3744

This means that on the investment of ₹3744, one would get shares worth ₹4476.15 which is a discount of ₹732.15.

Considering the share price of 31st July 2023. The closing price of Tata Motors was ₹644.30 and that of Tata Motors DVR was ₹414.30, so

Tata Motors = ₹644.30*7 = ₹4510.10 Tata Motors DVR = ₹414.30*10 = ₹4143

As the prices have increased, the discount has narrowed to ₹367.10.

Now it is more complex than it looks. There are various factors that come into the picture. When everything is done, and on the date when DVRs cease to exist, the share price may list at a premium or discount to the prevailing prices. But yes, we can say that the shares of Tata Motors are at a discount as long as the DVR share trades at a price less than the stock price of ordinary shares.

Company Financials

Now that we have discussed the share price, let’s shift our attention to the company’s financial performance:

The company's operating revenue in the 2022–23 fiscal year broke all previous records by reaching ₹3,45,967 crore. This amount represented a considerable rise of 24.2% over the revenues of the prior fiscal year of ₹2,78,454 crore. During this time, the company generated its biggest revenue in company history. The graph below displays the revenue performance of the Company over the past five years⤵️

Looking at the graph below will now give you a sense of the percentage of revenue that comes from the different sectors they serve:

Revenue FY 2022-23 (in ₹ crore)
Commercial Vehicle	70,816
Passenger Vehicle	47,868
Jaguar Land Rover	2,22,860
Financing	4,595

In FY 2022–2023, the Company raised no new long-term debt.

EBIT margin increased from 0.7% in FY 2021–22 to 3.6% in FY 2022–23. In FY 2021–22, the consolidated EBITDA margin was at 9.6%, which increased to 10.7% FY 2021–22's. The EBITDA Margin for the previous three years is shown in the graph below ⤵️

In comparison to the loss of ₹11,234.70 crore in the year 2022, the profit for the period (including share of associates and joint ventures) was ₹2,353.49 crore in 2023. View the graph to get an understanding of the company's profitability over the previous five years ⬇️

The total number of vehicles sold is crucial for an automaker to evaluate its business development. View the table below to see how many of each type of car were sold in 2021–2022 and 2022–2023 respectively.

	2021-22	2022-23
Passenger cars	1,94,185	2,24,450
Utility vehicles	4,72,154	6,37,877
Intermediate & Light Commercial Vehicles	63,097	68,606
SCV & Pick Up	1,80,222	1,99,769
CV Passenger Vehicle	17,699	28,374
Medium and Heavy Commercial Vehicles	1,06,547	1,25,888
Total	10,33,904	12,84,964

We can draw the interpretation that the Passenger cars segment and the Utility vehicles have shown significant increase. Along with being dominant in the Indian Market, the company has a good hold in other countries as well. Let me take you through the country wise bifurcation which shows the number of vehicles sold in the following countries:

Country	Number of vehicles sold
North America	81,629
Europe	74,349
UK	62,142
India	9,32,695
China	95,773

Another thing to take note of is that the Automobile Industry is a cyclical business so economic factors are going to have an effect. The company has shown poor ROE% for the past 3 and 5 years as seen in the picture below.

To know more about the financials you can click here.

The Bottom Line

Tata Motors Group's decision to cancel their "A" ordinary shares and issue ordinary shares signals a shift in their capital structure and governance approach. We have seen the likely impact of the decision and can say that overall, the cancellation of DVR shares brings multiple advantages, benefiting both the company and its shareholders, and marks a positive step towards a more streamlined and efficient operation.

By grasping the significance of DVRs and understanding their implications for investors, one can better gauge the outcome of this decision on Tata Motors' business and its shareholders.

Discount or not?🤷‍♀️ I will leave it for you guys to decide. Let’s see if DVR gets the attention that is required and if the list of companies with DVR shares increase from 3 to a significant number📈 or will it exhaust to a zero 📉.

Also Read: Tata Motors- Stock Analysis

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Insider by Finology and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.