Tata Motors DVR Shares Suspension – Conversion Process and Market Impact

The Indian company Tata Motors, which makes a lot of cars, recently said that dealing in its Differential Voting Rights (DVR) shares would be stopped. This move will have big effects on owners and the future of the company. This piece talks about the reasons for the suspension, how the conversion will work, and what might happen to shareholders and the market as a result.

People who own Differential Vote Rights (DVR) shares have fewer vote rights than people who own ordinary shares. Tata Motors created DVR shares in 2008 to raise money while giving current owners the right to vote. Each DVR share usually has ten times the voting power of an ordinary share but pays out more in dividends. This makes them appealing to investors who want to make money instead of controlling the business.

Tata Motors announced that for every 10 DVR shares, investors would receive seven ordinary shares1. This conversion aims to simplify the company’s share structure and enhance liquidity for shareholders. The National Company Law Tribunal (NCLT) approved this restructuring plan, which is set to take effect on September 1, 20242.

The conversion process involves several steps:

Record Date: September 1, 2024, is the record date for determining the holders of DVR shares eligible for conversion.

Conversion Ratio: Shareholders will receive seven fully paid-up new ordinary shares for every 10 DVR shares they hold.

Capital Reduction: The conversion will lead to a reduction in share capital by 4%, as the number of shares in circulation will decrease.

Trust Establishment: Tata Motors has established an irrevocable determinate private trust named TML Securities Trust with Axis Trustee Services acting as an Independent Trustee. This trust will manage the conversion process and ensure compliance with regulatory requirements.

The conversion of DVR shares into ordinary shares has several tax implications for shareholders:

Deemed Dividend: The conversion is treated as a distribution of accumulated profits, which is considered a deemed dividend under Section 2(22)(d) of the Indian Income Tax Act, 19611. This means that the accumulated profits as of the record date will be taxable in the hands of shareholders.

Tax Deducted at Source (TDS): TDS will be applicable on the deemed dividend. TML Securities Trust will pay this TDS on behalf of shareholders by selling a portion of the newly allotted ordinary shares.

Short-Term Capital Gains (STCG): The trust will also pay STCG for selling shares to cover the TDS.

Long-Term Capital Gains (LTCG): Shareholders who receive ordinary shares against DVR shares will be liable to pay LTCG when they sell these shares.

The suspension and conversion of Tata Motors DVR Shares have several potential impacts on shareholders:

Improved Liquidity: By means of the conversion into ordinary shares, liquidity is projected to be improved, therefore facilitating shareholder purchase and sales.

Although DVR shares provide better dividends, the conversion to ordinary shares could cause dividend income for stockholders to be reduced.

Market Value: The conversion ratio of 10:7 represents a 23% premium over the DVR shares’ pre-closing price and a 30% discount over ordinary shares. This could affect the market value of the shares post-conversion.

Market Reaction: The market has reacted positively to the announcement of the conversion. Shares of Tata Motors DVR closed 2.5% higher at ₹765.15 on the BSE on the day of the announcement. Over the past two years, Tata Motors DVR shares have provided substantial returns, gaining 223.6%2. The restructuring is seen as a strategic move to streamline the company’s share structure and improve shareholder value.

Tata Motors has taken a big step toward making its share structure easier to understand and giving owners more options by suspending and converting its DVR shares. The conversion process has several steps and will have tax effects, but the end result should be good for both the company and its owners. As Tata Motors continues to make this change, investors will be paying close attention to how the market reacts and how this smart move will pay off in the long run.