The Curious Case of Tata Motors’ DVR shares

What are DVR shares and why is everyone talking about them?

With Tata Motors shooting through the roof last week and providing phenomenal returns (here’s our take on why), everybody from “finfluencers” to analysts has suggested that people should invest in its DVR shares. 

Err, what?

Well, firstly Tata Motors has two classes of shares: the regular Tata Motors Limited shares and Tata Motors Differential Voting Rights (DVR) shares. 

But what are DVR shares, you ask?

These are shares that offer different voting rights to investors, duh! 

Usually, you buy shares, hold them for some time with an intent to sell at a higher price, and earn profits. But shares are more than just a gambling tool. When you buy shares of a company, you also get a say in important decisions of the company such as who the directors are going to be, what will be the objective of the business, etc. You have a right to vote.

Usually, one share gives one vote to the shareholder. But with DVR shares, you can have more or even less than one vote per share. 

Wondering why someone would buy shares with lower voting rights?

The same reason that tempts us to buy copies of designer goodies. They are available at a discounted price! To make up for your loss of votes, companies give you a higher dividend on DVR shares as an added bonus. For instance, Tata Motors offers a 5% extra dividend on DVR shares than its regular shares.

And well, let’s be honest, do we even take the trouble of exercising our voting rights? So DVR gives us the option to renounce something that we don’t even bother about. That too, for a discount! Isn’t that cool?

But what’s in this for the companies?

Best of both worlds. They get to raise funds quickly. That too without diluting the voting rights of the major shareholders.

And oh! Did you know that Tata Motors was the first company in India to issue DVR shares way back in 2008? Why? To partly fund its $2.3 billion acquisition of Jaguar Land Rover. Companies like Gujarat NRE Coke, Future Enterprises, and Jain Irrigation soon followed Tata's footsteps. 

But before you go rushing to buy DVRs, read on.

Very few Indian companies currently offer DVR shares, as compared to the rest of the world. And even if they do, there is a very low demand for them. Why?

Because the companies issuing DVRs were required to have a history of profits for three consecutive years. So, many companies were not even eligible to issue DVRs. Result? 

DVRs lost their popularity as a whole. They mostly trade at very low prices, and have few interested buyers. This also makes these shares "illiquid" or, in simple terms, difficult to get rid of. 

For instance, when Tata first issued DVR shares, it offered a 10% discount on ordinary shares. But now they cost 48% less than Tata Motors shares. And just 7-8 months back this gap was 65% wide!

Then why are analysts recommending buying Tata Motors DVR now?

Because of Tata Motor’s stellar performance this year, the price gap between Tata Motors’ DVR and Tata Motors’ ordinary share has shrunk. And experts believe it could further narrow down to a steady 35%. DVR as a concept is also gaining popularity, SEBI has now made issuing DVR shares much simpler for companies (especially for tech startups).

On the flip side, its better-than-average performance this year means it could be due for a correction. 

Tata Motors DVR share prices have soared very high this year (with all the extra attention it is getting). So, investors may think this is a good time to cash in on their investments and sell their stocks (what we sometimes call profit booking). This could cause its price to decline by ~15%-20%, some analysts predict.

This brings us back to the main question: Is buying Tata Motors DVRs a good idea or a bad one? What do you think?

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Disclaimer: Nothing in the write-up should be construed as investment advice. This is merely to help you understand how DVRs work. Purely educational, and of course, jargon-free :)

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