Tata Motors DVR shares jumped as high as 14% at Rs 426.00 per piece on BSE in the early morning trade on Wednesday (July 26). The sharp jump in the company’s share price came a day after the automobile manufacturer approved a Scheme of Arrangement for the cancellation of ‘A’ Ordinary Shares, and issue of seven Ordinary Shares for every 10 ‘A’ Ordinary shares held by shareholders.

The decision to cancel the differential voting rights or DVRs has been taken further to simplify the capital structure.

In an exchange filing, the company said “Tata Motors Board has approved a NCLT Scheme of Arrangement for cancellation of “A” ORD shares and issuance of ORD Shares as consideration for the cancellation/capital reduction 

Under the scheme of arrangement, every “A” ORD shareholder will receive 7 ORD shares for every 10 “A” ORD shares held (“Capital Reduction Consideration”). This translates to a 23% premium to the previous day closing price (1) of “A” ORD shares; and a 30% discount to ORD share price (vs ~43% prevailing discount(1).

What does the cancellation of DVRs mean to shareholders?

One should note that holders of ordinary shares have different voting and dividend rights when compared to holders of DVRs. DVRs have 1/10th of the voting rights of ordinary shares and are eligible for five percentage points higher dividend payout.

Tata Motors DVRs trade at a price that is nearly 50% of that of ordinary shares and thus offer arbitrage opportunities to investors.

On Tuesday, Tata Motors DVRs settled almost 5% higher at Rs 374.40 per share, while the ordinary shares of the company were up 1.6% at Rs 639.45 per share.

Who are DVR Holders?

Over 90% of Tata Motors DVRs are owned by the public, the company also counts some marquee investors in this list.

ICICI Prudential holds the highest stake at 19.35%, while Mutual funds own 28.82% stake in Tata Motors DVRs.

Foreign portfolio investors including Franklin Templeton, Government of Singapore, and Vanguard cumulatively hold 18.6%. Tata Motors DVRs are also owned by Rekha Rakesh Jhunjhunwala.

Tata Motors said that DVR holders will be entitled to receive seven fully paid-up ordinary shares of the company, for every 10 DVRs they hold.

The capital reduction consideration translates to a 23% premium on the last day’s closing price of DVRs, translating to a 30% discount to ORD share price (vs ~43% prevailing discount).

The scheme will lower the outstanding equity shares by 4.2%, making it value-accretive for all shareholders.