The decision to cancel them comes 15 years after its issuance. What’s also interesting to know is that it is the only large listed corporate to have had such an instrument.
The holders of DVRs have different voting and dividend rights when compared to holders of ordinary shares.
DVRs carry 1/10th of the voting rights of ordinary shares and are entitled to five percentage points higher dividend payout.
Tata Motors DVRs trade at a price almost half of that of ordinary shares, and therefore, provide arbitrage opportunities to investors.
On Tuesday, Tata Motors DVRs closed nearly 5% higher at Rs 374.40, whereas the ordinary shares of the company ended 1.6% higher at Rs 639.45.
Who are the DVR Holders?
More than 92% of Tata Motors DVRs are held by the public, the automaker counts some marquee investors in this list.Mutual funds have a 28.82% stake in Tata Motors DVRs, with ICICI Prudential holding the highest at 19.35%.
Among foreign portfolio investors, who cumulatively hold 18.6%, are Franklin Templeton, Government of Singapore, and Vanguard.
Tata Motors DVRs are also held by Rekha Rakesh Jhunjhunwala. She held a 1.92% stake as of June end.
What will DVR Holders get?
Under the scheme of arrangement, the DVR holders will get seven fully paid-up ordinary shares of the company, for every 10 DVRs they hold.
The capital reduction consideration 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.
How to trade DVRs?
The DVRs currently trade at about a 43% discount to the ordinary shares.
As traders saw arbitrage opportunity, Tata Motors DVR shares jumped 18% to day’s high at Rs 440 today.
If the spread trades at around 8-10% +/-, then the existing DVR/ordinary share spread holders should unwind their positions, according to Nuvama Equities.
Considering it will take around 12-14 months for the scheme of arrangement to come into effect, the ideal spread to set up a fresh position should be 15%.
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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