Interested in buying Tata Motors Ltd’s shares at a 41% discount to its current market price? This is possible, if one is willing to settle for lower voting rights. What’s more, investors in these shares with differential voting rights (DVR) can enjoy an additional 5% dividend compared with investors in ordinary shares. Seems like a great deal; but there seem to be hardly any takers.
In fact, the discount has only widened in the past few months. Between September and November 2009, Tata Motors’ DVR shares traded at a discount of around 24%. In developed markets, DVR shares are known to trade at a discount of roughly 5-10% compared with the ordinary shares.
Even though investors can have the same economic ownership in a firm with DVR shares, they trade at a discount because of their lower voting rights. While retail investors may not care much for voting rights, they are of value to some institutional investors. Still, a discount of over 40% is odd.
In Tata Motors’ case, the DVR shares were issued in a rights offering during the bear market of 2008. The issue devolved, leaving the promoter group with most (over 84%) of the DVR shares. Much of the balance was held by IFCI Ltd. As a result, there was hardly any floating stock and hence liquidity was low. Due to the low float, the DVR shares traded at a premium for some time and it was until IFCI and Tata Motors’ promoters offloaded some of their stake to institutional investors between September and November 2009 that they started trading at a large discount to the ordinary shares. Tata Motors’ promoter group now owns 56.6% of the DVR shares, down from 84.3% at the end of June 2009.
Graphic: Yogesh Kumar / Mint
Perhaps it’s the possibility of more sales by the promoters that’s keeping prices depressed. After all, it doesn’t make sense for promoters to hold shares with lower voting rights. On the contrary, such instruments were devised for minority shareholders, in order that the promoter group’s voting interest isn’t compromised.
The large discount could well be a blip then and prices may increase in relation to the ordinary shares in due course. But it may be a while before an arbitrage trade turns profitable—after all, the large discount has not only persisted for many months, but has even widened. In fact, an arbitrage trade to take advantage of the seemingly high 30% discount in December would have ended up in huge losses based on the current discount of 41%.
But for an investor who’s interested in buying Tata Motors’ stock, it makes sense to buy the DVR shares at a steep discount. Even in the case of Pantaloon Retail Ltd, which doesn’t have the problem of an anticipated share sale by promoters, DVR shares trade at a discount of as high as 43.5%.
It may well be that Indian investors haven’t warmed up to the idea of investing in shares with differential voting rights.