Tata Motors' DVR or Differential Voting Rights shares have been in the limelight of late. They have risen by nearly 20% since the start of the month and have outperformed the ordinary shares by a great margin. However, that wasn't the case till until few weeks back. The ordinary shares were cornering all the glory and the DVRs were trading at a huge discount. Hence, the question that begs itself is, Why this sudden interest in DVRs?
We may have to go back to October 2008 to make some sense of it. This was the time when Tata Motors came out with a rights issue where it offered 1 DVR for every six ordinary shares held. It should be noted that along with the DVR, the company also offered one ordinary share, again for every six shares held. And thus, Tata Motors became the first company in India to issue a DVR. Important to add that DVRs are far more common in other markets.
As the name suggests, DVRs or differential voting rights are shares that carry different voting rights than ordinary shares. In this case, voting right for one DVR was equal to 10% of the voting right of an ordinary share. Thus, DVRs are perhaps issued to help promoters prevent a hostile takeover of their company. A DVR issue brings in the same amount of money or may be slightly less. But it certainly clips the decision making ability of the investor investing in it.
However, not everything is loaded against DVR shareholders. There are a few benefits given to them. Usually, they get to invest in shares at a slightly lower price than ordinary shareholders. They also get a slightly higher dividend per share. These numbers stood at 10% and 5% respectively in the case of Tata Motors. In other words, a discount of 10% was given to DVR shareholders over ordinary shareholders. And the former are also entitled to a dividend that is 5% more than what is given to ordinary shareholders.
Everything else remains the same for the two sets of shares apart from the differences mentioned above. Generally, it is observed that DVRs trade at a 10%-15% discount to ordinary shares. However, in the case of Tata Motors, a 30%-40% discount was routine. Currently, even after the run up in DVRs, they still trade at a 30% discount to ordinary shares. Whether this gap gets filled is anybody's guess.
Voting rights are essential when the firm under consideration is not optimally managed and there is some sort of value unlocking that the new management can bring in. However, that does not seem to be the case with Tata Motors. We believe that the company is indeed managed quite well by its current management. Thus, its DVR should ideally trade at only a small discount than what is the case currently.
Hence, if one is a minority investor and doesn't care about voting rights that much, investing in the DVR would certainly be a good option. Not only does he stand to gain if the difference reduces further and falls in line with international standards, he will also be entitled to higher dividends. Furthermore, he can always invest back in ordinary shares by exiting DVRs once the differential narrows. Thus, the risk reward ratio of investing in DVRs looks somewhat skewed towards the latter.
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