Tata Motors rights issue with DVR

Sep 25, 2008 Stock Market

Tata Motors is all set to launch the country’s first rights issue with a component of differential voting rights (DVR), or "A Class shares".

Meant to serve as repayment of funding for their acquisition of Jaguar-land Rover for $2.3 billion, the size of this rights issue is Rs.4,145.8 crore, of which the DVR component accounts for Rs.1,960.4 crore. 67% of the DVR issue has been underwritten by JM Financial with the Tatas committing to pick up the balance.

What exactly is DVR ?

To put it simply, it offers you more money in exchange for your voting rights. In this issue, the DVR shares would offer 5% more dividend but will be eligible for only 1/10th the voting rights as compared to ordinary shares, so a shareholder holding "A Class" shares will be entitled to 1 vote for every 10 "A Class" shares held. These class of shares are being offered at Rs. 305, which is 10% lower than that of the ordinary rights issue (Rs.340).

There will be no difference as far as corporate actions on the stock are concerned, whether issue of bonus shares, rights, buyback, stock splits and any open offer as per SEBI guidelines.

Other than these "A Class" shares, Tata Motors is also issuing rights for ordinary shares in the ratio 1:6, which means 1 share for 6 held, at a price of Rs.340.

I’m probably going to give this one a miss.

Update: This is also the first issue where the ASBA (Application Supported by Blocked Amount) service is being used. A new payment mechanism introduced by SEBI, it seeks to allow investors participation in IPOs and rights issues by only blocking funds to that extent, the actual funds transfer happening after allotment of shares.

However, with the markets sinking everyday, the stock will anyway be available at the rights price, which is a situation also being faced by Hindalco, who’s current market price is the same as that in it’s rights issue.

Another update: Why investors may lose out on ASBA in this rights issue