How Tata motors is simplifying capital structure

Tata Motors simplifying its capital structure

In the last one year, Tata Motors has made a serious attempt to simplify and unify its capital structure. Till end of 2022, Tata Motors had 3 classes of capital. It had American Depository Shares (ADS) listed on the NYSE. In India, Tata Motors had 2 classes of shares viz, the regular Ordinary Shares and the Ordinary “A” shares which are also called DVR shares or shares with differential voting rights. These DVR shares were paid a higher dividend compared to the Ordinary Shares but had substantially lower voting rights. In the first step to simplification, Tata Motors delisted its ADS from the NYSE in February 2023 this year. 

Since the company had seen a substantial increase in foreign participation and volumes in the 19 years since the ADS listing, it did not see the need to continue with the ADS any longer. Hence after the delisting of the ADS on the NYSE, Tata Motors was only left with the Ordinary Shares and the DVR shares. Now, Tata Motors has taken a decision to convert the DVR shares also into Ordinary shares so that there is just one equity class left in the balance sheet capital structure.

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How will DVRs be converted into ordinary shares?

While announcing the quarterly numbers for Q1FY24, Tata Motors also announced plans to convert the outstanding DVR shares into Ordinary shares. As a consideration to the holders of Tata DVR, the company will issue 7 fully paid-up new ordinary shares with a face value of Rs2 for every 10 'A' ordinary shares (DVRs) with a face value of Rs2 held by the investors. This will be the consideration and the entire operation will be via a swap of shares, leading to the eventual cancellation of the DVR shares. The entire activity will be routed through trust which will then convert the DVR shares into Ordinary Shares.

Is the deal to the benefit of Tata DVR holders?

In a sense, they get a lesser number of shares and lesser dividend post the conversion, but they get more voting rights. Also, the company is taking care of the DVR holders by converting their DVR at a substantial premium so that the DVR holders are compensated for any intermediate loss they may incur in the form of the number of shares or lower dividends. Here are some of the key highlights of the conversion agreement.

• Under the terms of the conversion scheme, Tata Motors will issue 7 Ordinary shares of Tata Motors as consideration for every 10 DVRs of Tata Motors held. At the market price levels on the date of announcement of the conversion, this translates into a premium of 23% over the stock price.
   
• The conversion of DVR shares in the ratio of 7:10 into ordinary shares will result in the effective reduction of the number of outstanding shares by 4.2%. This is likely to be EPS accretive and (assuming constant or better valuations in the form of P/E ratio), this move is also likely to be value accretive for shareholders.
   
• The current cancellation of the DVR shares must be seen in conjunction with the termination of the ADS program in the month of February 2023. Jointly, the two moves are intended to simplify and consolidate all traded equity securities of Tata Motors under the banner of Ordinary shares on both the principal stock exchanges.

Understanding the DVR swap into shares in numbers

The “A” Ordinary shares, or DVR shares, were issued by Tata Motors Ltd in the year 2008 and subsequently via qualified institutional placements (QIP) in 2010 and rights issue in 2015. Post 2015, several regulatory changes restricted the issue of such shares with differential voting rights. Also, in the Nifty 50, Tata Motors was the only large company to have a dual capital structure. The DVR shares have consistently traded at a discount of 35% to 45% to the price of Ordinary shares of Tata Motors. The consideration of 7:10 offered translates into a premium of 23% to the current arrangement. Here is how the swap will work at the extant market prices of both securities. Let us look at it from the perspective of an investor holding 1,000 DVR shares of Tata Motors.

Data Source: NSE (# price on July 28, 2023)

You may wonder why the premium on swap is only 7.49% and not 23% as claimed. This is the swap based on current price while the actual swap will take place on average prices. Also, the price of Tata Motors DVR has rallied sharply after the announcement. For instance, in the last 7 trading sessions, Tata Motors stock has just moved from Rs620 to Rs636; a move of just about 2.6%. During the same period of last 7 trading sessions, the stock price of Tata Motors DVR has rallied from Rs344 to Rs415; a huge move of 20.6%. That explains the compression in the swap premium. However, we have to wait for the actual dates and price to be announced, but premium on swap is expected to be attractive.

The next steps in the conversion

As of now only the board approval has come through. The deal will require the approval of the shareholders, the lenders, and regulatory bodies like SEBI and NCLT. The company has roped in PWC as the independent registered valuer for the transaction. In addition, Citigroup will provide their fairness opinion for the “A” Ordinary DVR holders and Axis Capital will provide the fairness opinion for the “A” Ordinary DVR holders. Cyril Amarchand Mangaldas will act as the legal advisor to Tata Motors Ltd for the complete transaction. For Tata Motors that completes the simplification of its capital structure.