Ever wondered why there are two tickers (stock codes) for Tata Motors on the major Indian stock exchanges?
Both trade at different stock prices. But what are DVR Shares? If you had to guess, you might say they’re shares of two different subsidiaries of the same massive Tata group. They have so many businesses, it’s hard to keep track. A logical guess, but it would be wrong. The chart above with stock prices for the last 3 months shows an obvious correlation (0.993) between the two, i.e. they mirror each other’s percentage price changes.
Both stock codes represent equity ownership of the same company: Tata Motors. So what is the distinction? In addition to Tata Motors, Jain Irrigation and Gujarat NRE Coke also have two listed tickers, both with DVR in their names.
One of them refers to “Ordinary” equity shares while the other to “A class Ordinary” equity shares. Ordinary shares are the kind every listed company issues to shareholders, representing a proportionate claim to control and profits of the company.
‘A’ Ordinary Shares represent a differentiated level of ownership and control, hence called DVR – Differential Voting Right Shares. Technically, they can represent higher or lower claim of both, control and profits. However, in India, issuing DVRs with higher voting (control) rights is not allowed, so they only represent lower voting rights compared to Ordinary shares.
DVRs have been rarely issued in India, the exceptions being Jain Irrigation and Gujarat NRE Coke and the previously listed Pantaloon Retail.
This excerpt from the Tata Motors 2009 annual report explains the issuance of the first time DVR shares were issued in India:
In October 2008, the Company raised an aggregate of Rs.4139.33 crores through a simultaneous but unlinked Rights Issue of Ordinary Shares and ‘A’ Ordinary Shares of 64,276,164 Ordinary Shares of Rs.10 each a premium of Rs.330/- per share aggregating Rs.2185.39 crores in the ratio of one Ordinary Share for every six Ordinary Shares; and 64,276,164 ‘A’ Ordinary Shares of Rs.10 each at a premium of Rs.295/- per ‘A’ Ordinary Share aggregating Rs.1960.42 crores in the ratio of one ‘A’ Ordinary Share for every six Ordinary Shares.
Note the company (Tata Motors) issued the same number, 64,276,164 shares of each, Ordinary and ‘A’ Ordinary shares. However, they were priced differently, at Rs 340 and Rs 305 respectively. The reason was they represented different claims on the company, as explained here
The Company was one of the first in India to issue differential voting shares. The ‘A’ Ordinary Shareholders enjoy all rights and privileges that are enjoyed by Ordinary Shareholders in law and under the Articles of Association, except as to dividend and voting, viz. the right to receive dividend for any financial year at five percentage points more than the aggregate rate of dividend declared on Ordinary Shares for that financial year and the right to vote any resolution on a poll or by postal ballow, by one vote for every ten ‘A’ Ordinary Shares held.
Tata Motors ‘A’ Ordinary or DVR shares have only 10% of the voting rights of ordinary shares. To compensate DVR owners, the company offered a lower price and a marginally higher dividend per share (5% higher dividend than that declared for Ordinary shares)
In a nutshell, DVRs (Differential Voting Right Shares) are a mechanism for companies to raise additional capital while minimizing dilution of existing shareholders.
However, since 2008 when Tata Motors introduced the first DVR share issue in India, very few other companies have chosen this route, suggesting maybe for most companies, the flexibility of differential control is not justified by the added complexity of a separate class of shares.
Should you buy DVR shares over ordinary shares?
Not really. Unless they are being offered at a significant discount to regular shares with a dividend premium (5% on Tata Motors is hardly significant), and there are enough DVRs in circulation to ensure liquidity.