8 mins read . 28 Jul 2023
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.
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.
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.
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.
|Particulars||Tata Motors Shares||Particulars||Tata Motors DVR|
|Current holding||Nil||Current Holding||1,000 shares|
|Market Price #||Rs636.55||Market Price #||Rs414.55|
|Value of Holding||Nil||Value of Holding||Rs4,14,550|
|Conversion ratio||7 given for 10 DVR||Conversion Ratio||10 given for 7 shares|
|New Holding||700 shares||New Holding||Nil|
|Value of Holding||Rs4,45,585||Premium on swap||7.49%|
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.
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.