Tata Motors DVR hogs limelight amid heavy discount

ata Motors' DVR shares surged amid optimism that liquidity on the counter will improve amid reports that Tata Sons will pare its stake through a book-building route. Tata Sons had reduced its stake to 54% from 73% in 2009 and is further planning to cut it in an attempt for better pricing for the DVR, which is currently quoting at a significant discount to Tata Motors. Tata Sons plans to sell the DVRs in the open market through an auction and has also reportedly appointed Tata Capital for the transaction. On April 13, in bulk deal on the exchanges, Tata Sons sold ~1.6mn shares. HDFC MF bought ~1.05mn shares at an average rice of Rs485 per DVR. Tata Motors’s DVRs (with a one-tenth voting right compared to ordinary shares) have been trading at a ~40% discount to the ordinary shares. The ‘A’ class shares have a 5% higher dividend than ordinary shares.

The Tata Motors DVR had been under pressure due to offloading of large stakes by Tata Sons and other major shareholders like IFCI and Tata Steel. The latter two together held a 15% stake in the DVR, which they have been selling to several investors. The DVR shares rights issue happened when market was in downturn and most of the shares were subscribed by the promoter(s). In a note this week, IIFL said that globally, shares with lower voting rights trade at only a 3-5% discount to those with higher voting rights when there is enough liquidity in both classes of shares. The steep discount for the Tata Motors DVR is due to illiquidity. However, in the past few months, the initial holders of the DVRs have sold more than a third of their holding, so liquidity in DVRs is likely to improve, going forward. So, the discount between Tata Motors and the DVR should narrow down further going ahead.