Tata Motors to Cancel DVR Shares and Simplify Capital Structure: A Milestone Decision After 15 Years

Tata Motors makes a historic decision to cancel DVR shares, simplifying its capital structure after 15 years. Explore the impact on shareholders, taxation details, and the company’s innovative journey.

Tata Motors, a renowned name in the automotive industry, has employed an innovative financial instrument known as Differential Voting Rights (DVR) shares to attract investors. DVR shares offer varying voting rights to shareholders, a departure from the traditional equal voting power in regular equity shares. This article delves into the history of DVR shares issued by Tata Motors, highlighting their current status in the company’s capital structure.

The Emergence of Tata Motors DVR Shares: DVR shares were introduced by the Indian Government through the Companies Act, 1956, to provide companies with the flexibility to issue shares with varying voting rights. The primary objective was to allow promoters and founders to retain control over decision-making while raising funds from the public.

Tata Motors, being a prominent player in the Indian automobile sector, saw an opportunity to utilize DVR shares as a means to raise capital while safeguarding the interests of its founders and existing shareholders.

Tata Motors’ Issuance of DVR Shares: In 2008, Tata Motors made history by becoming the first Indian company to issue DVR shares under the revised Companies Act, 1956. The issuance of DVR shares by Tata Motors aimed to attract investors who sought economic benefits and dividends without an equal say in the company’s voting matters.

The DVR shares were issued with differential voting rights, granting the holders fewer votes per share compared to regular equity shareholders. This enabled Tata Motors’ founders and promoters to maintain a controlling stake in the company while allowing public investors to participate in the growth story of one of India’s leading automotive giants.

Current Status of DVRs: Tata Motors has decided to cancel the differential voting rights or DVRs to further simplify the capital structure. The decision to cancel them comes 15 years after its issuance. What’s also interesting to know is that it is the only large listed corporate to have had such an instrument. The holders of DVRs have different voting and dividend rights when compared to holders of ordinary shares. DVRs carry 1/10th of the voting rights of ordinary shares and are entitled to five percentage points higher dividend pay-out. Tata Motors DVRs trade at a price almost half of that of ordinary shares, and therefore, provide arbitrage opportunities to investors.

Tata Motors announced on July 25, 2023 along with its results that, upon the effectiveness of the Scheme, the company will issue 7 fully paid-up new ordinary shares with a face value of ₹2 for every 10 ‘A’ ordinary shares with a face value of ₹2. This issuance will serve as consideration for the reduction and cancellation of the ‘A’ ordinary shares.

Taxation Aspect: Regarding taxation, ‘A’ ordinary shareholders will face taxation, which includes withholding taxes for deemed dividends and capital gains. To handle the tax liabilities, the company will establish an independent trust to execute the scheme. This trust will sell ordinary shares to cover the relevant taxes, and the remaining net ordinary shares and cash for fractional entitlement will be added to the shareholders’ accounts.

Conclusion: Tata Motors’ ground-breaking move to issue DVR shares in 2008 demonstrated the company’s adaptability to innovative financial instruments. The introduction of DVR shares allowed Tata Motors to strike a balance between raising capital and retaining founder control, setting a precedent for other Indian companies to follow.

Tata Motors’ recent decision to cancel the issuance of Differential Voting Rights (DVRs) marks a significant milestone in the company’s history, as it comes 15 years after their introduction. As the sole large listed corporation in India to have employed such an instrument, the cancellation highlights the company’s commitment to streamlining its capital structure.

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Dear Sir,

Sub: Intimation of outcome of the Board Meeting under Regulation 30 and Regulation 51 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI Listing Regulations”)

In terms of Regulation 30 and Regulation 51 read with Schedule III of the SEBI Listing Regulations, we hereby inform you that the Board of Directors (“Board”) of Tata Motors Limited (“the Company”) at its Meeting held today, i.e., on July 25, 2023, based on the recommendations of the Audit Committee and Committee of Independent Directors, approved a Scheme of Arrangement amongst the Company and its shareholders and creditors, under Section 230-232 of the Companies Act, 2013 (“the Act”) and other applicable provisions of the Act and Rules framed thereunder, inter alia, for reduction of capital of the Company by way of cancellation of the entire ‘A’ Ordinary Shares of the Company and issuance and allotment of the Ordinary Shares, which would rank pari passu with the existing Ordinary Shares in the Company, as consideration for such reduction of capital (“Scheme”), subject to obtaining of all regulatory approvals/permissions, as applicable in this regard. The Scheme is subject to necessary approvals including that from Securities & Exchange Board of India (“SEBI”), the shareholders and creditors of the Company and the Hon’ble National Company Law Tribunal (“NCLT”).

The Company shall approach the NCLT for approval of the Scheme under Section 230-232 of the Act and other applicable provisions of the Act read with the SEBI Master Circular bearing no. SEBI/HO/CFD/PoD-2/P/CIR/2023/93 ‘Master Circular on (i) Scheme of Arrangement by Listed Entities and (ii) Relaxation under Sub-rule (7) of rule 19 of the Securities Contracts (Regulation) Rules, 1957’ dated June 20, 2023, and SEBI Operational circular no. SEBI/HO/DDHS/ DDHS_Div1/P/CIR/2022/0000000103 dated July 29, 2022, as amended from time to time and any other applicable SEBI Circulars (collectively the “SEBI Scheme Circulars”).

The details required to be disclosed under Regulation 30 and Regulation 51 of the SEBI Listing Regulations including all circulars and notifications issued thereunder, as amended from time to time read with the SEBI Master Circular bearing no. SEBI/HO/CFD/PoD2/CIR/P/2023/120 ‘Master circular for compliance with the provisions of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 by listed entities’ dated July 11, 2023 and the SEBI circular bearing no. SEBI/HO/CFD/CFD-PoD-1/P/CIR/2023/123 ‘Disclosure of material events / information by listed entities under Regulations 30 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015’ dated July 13, 2023, are enclosed herewith as Annexure A to this intimation. Also attached is the press release on the said matter as Annexure B.

The Board Meeting commenced at 11.30 A.M. (IST) and ended at 3.20 P.M. (IST). We request the exchanges to take the aforesaid disclosure in their records.

Yours faithfully,
Tata Motors Limited

Maloy Kumar Gupta
Company Secretary

ANNEXURE A

Disclosure under Regulation 30 of the  Securities and Exchange Board of India (Listing
Obligations and Disclosure Requirements) Regulations, 2015

ATTACHMENT 1

TATA MOTORS LIMITED – SHAREHOLDING PATTERN AS ON JUNE 30, 2023 (Pre)

* ‘A’ Ordinary Shareholders are entitled to one vote for every ten ‘A’ Ordinary Shares held by them.

TATA MOTORS LIMITED – EXPECTED SHAREHOLDING POST EFFECTIVENESS OF THE SCHEME (Post)

** Upon effectiveness of the Scheme, the Company shall issue 7 fully paid up New Ordinary shares of face value of INR 2 (Indian Rupees Two only) for every 10 ‘A’ Ordinary Shares of face value of INR 2 (Indian Rupees Two only) as a consideration for the reduction and cancellation of ‘A’ Ordinary Shares.

Annexure B

Simplification and consolidation of capital structure

• The Board of Tata Motors Ltd has approved a Scheme of Arrangement for a capital reduction of the ‘A’ Ordinary shares and issue Ordinary shares as a consideration for the reduction.
• The Capital Reduction Consideration translates to a 23% premium¹ to the ‘A’ Ordinary Share price.
• This will result in a 4.2% reduction in the number of outstanding equity shares, making it value accretive for all shareholders.
• The termination of the ADS program along with the proposed scheme of capital reduction of ‘A’ Ordinary shares will simplify and consolidate all traded equity securities of Tata Motors into Ordinary Shares listed only on NSE and BSE.
• The above transaction is subject to regulatory and shareholder approvals.
  Mumbai, July 25, 2023:

Post completion of delisting of the American Depository Shares from the New York Stock Exchange as of 23^rd January 2023, Tata Motors Ltd (“TML”)) has currently two types of listed equity securities, namely Ordinary Shares and ‘A’ Ordinary Shares. The ‘A’ Ordinary Shares carry 1/10^th of voting rights of Ordinary Shares and are entitled to five percentage points higher dividend. To further simplify the capital structure, the Board of Directors of TML, have today approved a Scheme of Arrangement (“Scheme”) for cancellation of ‘A’ Ordinary Shares, and issue of 7 Ordinary Shares for every 10 ‘A’ Ordinary Shares as consideration (“Capital Reduction Consideration”).

The ‘A’ Ordinary shares were first issued by TML in 2008 and subsequently in a further QIP in 2010 and rights issue in 2015. Regulatory changes have since restricted the issuance of such instruments with differential voting rights and TML remains the only large listed corporate with such an instrument. The ‘A’ Ordinary Shares currently trade at ~ 43%¹ discount to Ordinary Shares. The Capital Reduction Consideration implies a 23% premium¹ on the previous day’s closing share price of ‘A’ Ordinary shares, translating to 30% discount¹ over Ordinary Share price and significantly below its historical averages. The Scheme will lead to a reduction in the outstanding equity shares by 4.2%, making it value accretive for all shareholders.

The Scheme also envisages creation of a Trust with an independent third party acting as a Trustee, to operationalize the various actions required to give effect to the Scheme in accordance with applicable laws. The Trust shall receive the Ordinary shares issued by TML to the ‘A’ Ordinary holders and will then issue the Ordinary Shares as per the Capital Reduction Consideration on a ‘net’ basis to the ‘A’ Ordinary shareholders, post settlement of applicable taxes.

The Scheme is subject to regulatory and shareholder approvals. PWC is the independent registered valuer for the transaction, with Citigroup and Axis Capital acting as fairness opinion providers for the ‘A’ Ordinary and Ordinary shareholders respectively. Cyril Amarchand Mangaldas are the legal advisor to TML for the transaction.

Notes:-

1 Basis closing price of ‘A’ Ordinary Shares and Ordinary Share price on NSE as of 24^th July 2023