The End of Differential Voting Rights: Tata’s DVR Share Cancellation Explained

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. 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 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:
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.
This news story will serve as an excellent case study for both professionals and students alike.