Tata Motors DVR shares trade at 40% discount, analysts foxed  

January 6, 2010

The differential voting rights (DVR) shares of Tata Motors are quoting at a substantial discount to the normal Tata Motors shares. Currently, the stock price of Tata Motors is Rs812 while the Tata Motors DVR shares are trading at Rs510. The discount is as high as 40% and market analysts are at a loss to explain this phenomenon. If this indeed is a case of simple market imperfection, it is a huge arbitrage opportunity waiting to be exploited.

In 2008, Tata Motors had issued 6.41 crore shares as a part of its plan to raise Rs4,145 crore through a rights issue for repaying the loan taken for funding the acquisition of luxury brands Jaguar and Land Rover. The DVR shares were listed on the stock exchanges in November 2008. The ordinary rights issue was priced at Rs340 a share, while the DVR shares were priced at Rs305 a share.

The Tata Motors DVR shares carry 1/10th of voting rights. But shareholders are entitled to a 5% higher dividend than ordinary shares in lieu of surrendering voting rights. Explaining the reason for such a huge difference in the stock and DVR prices, an analyst said that the DVR shares were given as a rights issue when the market was in a downturn and most of the shares were subscribed to by the promoter, Tata Sons.

The analyst added that liquidity was a major concern because more than 80%-85% of the DVR shares were with the promoters. He said that promoters have now started liquidating their holdings. In the last quarter, their shareholding came down by 4% and even in November they continued to sell, he said.

This move has depressed the prices. According to the analyst, currently the market concern is that if the promoter keeps on selling, then the discount will be maintained, since it has a lot of shares to sell. He also said that DVRs are generally quoted at a discount of 5% to 10% in foreign markets.

He said that fundamentally, there is an arbitrage opportunity but liquidity was a problem, which has now started to improve. But promoter’s dilution remains an issue.

However, a market participant has a different information and view. According to him, the Tatas are actually mopping up the DVR shares. He said that recently when IFCI sold off a part of its DVR holding, JM Financial bought the shares. Since JM is extremely close to the Tatas, the speculation is that they are actually warehousing the DVR shares for the Tatas. One reason the Tatas could be buying the DVR shares is that they see this as a way of increasing their holding subsequently. However, it is not clear how this can be done legally. In any case, this makes for an even stronger case for the arbitrage opportunity.

“DVR (shares) should trade at 10% discount. The discount was higher over the last few months and ideally these shares should not trade at a 20% discount to the Tata Motors’ share price,” said Vaishali Jajoo, auto analyst, Angel Broking. She believes that the discount between the Tata Motors and Tata Motors DVR share price should come down. “Liquidity is the main reason for such a difference. For sophisticated investors, this is a good arbitrage opportunity which needs to be executed carefully,” said Jagannadham Thunuguntla from SMC Capital.
— Swapnil Suvarna & Ravi Samalad