Auto maker Tata Motors Ltd’s experiment with differential voting rights (DVR) shares, a new instrument to the Indian markets, has backfired. According to a report by FinanceAsia, JM Financial Ltd, an underwriter to the DVR issue, renegotiated its deal with the company in the middle of the rights issue, leaving the promoter group with 84.3% of the DVR shares.

Thanks to the poor response by minority shareholders, the Tata group also ended up buying 91.7% of the rights issue of ordinary shares.

Having picked up a bulk of these two tranches of the rights issue, the Tata group’s stake has risen to more than 42%, from 33.3% before the rights issue.

But note that the group’s stake would have risen to more than 47% if the entire rights issue would have consisted of ordinary shares.

The DVR shares have only one voting right for every 10 shares held, and such instruments are normally issued to minority shareholders, in order to protect the voting interest of the promoter group.

While this is a case of unintended consequences, the Tata group has clearly ended the loser, after buying more than four-fifths of the DVR issue. With the same investment, it could increase its stake in the automobile major by 5%, if only the choice of instrument was ordinary shares and not DVRs.

Another major part of the DVR issue went to IFCI Ltd, which bravely took on a sub-underwriting role from JM Financial. Both these large owners are unlikely to sell their shares in the open market, now that Tata Motors’ ordinary shares are trading at about half their rights issue price. It’s no wonder then that when the DVRs listed on Wednesday, their price discovery was wonky. DVRs are supposed to trade at a discount to ordinary shares simply because they have much lower voting rights.

Instead, they traded at Rs238 at close on Wednesday on the National Stock Exchange, a 30% premium to the ordinary shares. It’s the turn of a few small shareholders to get a raw deal.

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