Buy Tata Motors DVR: Way2Wealth

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Buy Tata Motors DVR: Way2Wealth

Way2Wealth has come out with its special coverage on Differential Voting Rights (DVR) with reference to the Tata Motors DVR. The research firm expects the discount to come down to a more respectable level of 30% which has been the average discount over the years.

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Way2Wealth has come out with its special coverage on Differential Voting Rights (DVR) with reference to the Tata Motors DVR. The research firm expects the discount to come down to a more respectable level of 30% which has been the average discount over the years.

DVR (Differential Voting Rights) as the name suggests are similar to ordinary equity share (common shares), but it provides fewer voting rights to the shareholder. They are listed and traded in the same manner as ordinary equity shares. However, most DVRs trade at a discount to ordinary shares as they provide fewer voting rights. Companies generally compensate DVR investors with a higher dividend than ordinary shares.

International and India Scenario
Many well-known blue chips internationally have raised funds using DVR route. On an average DVR shares trade at a discount of 10-12% to common shares. However, some even trade at a premium. A quick study of some of the international blue-chips companies that have issued DVRs have not given any conclusive evidence. We observe that cases where DVR has a higher proportion in the equity share capital mix are trading at a lower discount. NewsCorp, Viacom and Roche DVRs are such cases of lower discount. While in case of companies where DVR has lesser share in the equity share capital mix mostly trade at a higher discount. However, Volkswagen trades at a premium. In the Indian context, the premium/discount varies widely. Tata Motors is trading at the highest discount amongst the three companies that have issued DVRs.

Indian Scenario
In the year 2000, the Government of India allowed the issue of DVR shares by Indian companies. Internationally, DVR is a well-accepted instrument to raise funds. But even after more than a decade of the government's notification, the concept is yet to gain popularity in India.

Companies which have issued DVRs

Tata Motors
Nearly seven years after the government permitted the issue of equity shares with differential voting rights, in 2008, Tata Motors became the first Indian company to issue equity shares with differential voting rights (1 vote for every 10 shares held). Tata Motors had issued 6.4 crore shares with differential voting rights in November 2008 as part of its Rs 4145 crore rights issue to pay back the loan taken for its acquisition of Jaguar-Land Rover. The ordinary rights issue was priced at Rs 340 per share, Rs 35 higher than the differential voting shares. However, it agreed to pay 5% additional dividend on DVRs.

The reason behind issue of DVRs might be protection against hostile takeover since Tata Motors is a largely held public company and thus the shareholding of the promoters is not very high.

Pantaloon Retail : If Tata Motors is the first to issue rights shares with DVR option, in February 2009, Pantaloon, became the first to issue bonus shares with a DVR option to its existing shareholders. It announced a bonus issue of 1:10 shares (1 DVR shares for every 10 ordinary share held). The new shares were called Class B shares which entitled the shareholders to an additional 5% of the dividend over the dividend payable to Class A shares in any financial year. Ten Class B shares would carry one vote.

Gujarat NRE Coke : In September 2009, the company issued B equity shares with Differential Voting Rights. It carried 1/100th of the voting right of ordinary equity share. They issued as bonus shares in the ratio of 1 B equity shares for every 10 equity shares held.

A case for investment in Tata Motors DVR
The DVR rights issue of Tata Motors received very poor response from investors in 2008, as a result promoters subscribed to most part of the DVR. This was the time when there was very low awareness and hesitation amongst investors. As the awareness of the product increased, institutional investors and general public slowly started accumulating the DVR shares under the pretext of getting higher dividend. Since the whole idea of issuing DVRs for Tata Motors was to raise capital for funding a major acquisition, it did not make sense for promoters of the Company to hold major shareholding. Thus at one end public float went on increasing and promoters share holding reduced. According to the latest share holding pattern, promoters now hold only 9.1% (earlier 84%) DVR shares while foreign institutions hold 28% and local institutions hold 48% while public holding has increased to 11% from a meager share of 0.6% in Dec'08.

The premium/discount that DVR shares of Tata Motors have been trading at over a period of time. Tata Motors DVR traded at a premium initially albeit at very low volumes. As the volumes in DVRs increased with more and more participation from the institutional and public shareholders, the DVR started to trade at a discount due to the demand and supply dynamics. Currently, the discount of DVR shares to Tata Motors has widened to 50%. As promoters' holding has substantially narrowed over the period, we do not feel that the DVR discount is likely to widen any further. Tata Motors common shares have gained substantially in the past three years while DVR shares did not keep up the same pace. We feel further gains from Tata Motors might not be of the same magnitude as it has been in the past. Thus, investors willing to participate in the Tata Motors growth story and at the same time not interested in having a similar voting power may look for buying the DVRs instead of common shares as it is available cheaper and having more dividend yield.

We thus feel that there is more upside than downside to DVR shares at this point in time. We expect the discount to come down to a more respectable level of 30% which has been the average discount over the years. This would mean a capital appreciation of around 41% from the current levels of Rs 102 for DVR shares assuming Tata Motors at current prices. DVR shares have still not gained wide acceptance as it has internationally due to lack of understanding and awareness about the product. As witnessed globally, initially it took time for the product to be understood, after which it was able to gain acceptance by investors. Indian markets for DVRs though more than 10 year old still have lack of maturity to understand a sophisticated instrument like DVR. Currently, the issue of shares with differential voting rights has not been used as great deal by the Indian companies. Investor participation will increase only when investors understand that this instrument will give them higher dividend as well as they will get a chance to participate in the fundamental story of a Company through capital appreciation. Until then, not many companies will opt for the DVR route as a means of raising capital without much dilution of control even if it may be a more meaningful method.

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