Tata Motors on Tuesday announced a significant step to enhance its operational efficiency by approving a Scheme of Arrangement. The company's board has given the green light for the cancellation of all "A" Ordinary shares and the issuance of Ordinary (ORD) shares.
Tata Motors proposes cancellation of ‘A’ Ordinary shares: What does it mean for investors?
In 2008, Tata Motors issued 'A' Ordinary shares at a 10% discount to Ordinary shares, which carried lower voting rights (1/10th) but higher dividends (by 5%).
The primary objective behind this move is to streamline the capital structure and bring uniformity in voting and economic rights for shareholders.
As per the arrangement, every "A" Ordinary shareholder will receive 7 Ordinary shares for every 10 "A" Ordinary shares held. The proposed scheme will reduce the total share capital of Tata Motors by 4%, making it EPS-accretive for all shareholders.
Where are "A" Ordinary shares listed?
Tata Motors "A" Ordinary shares are listed on Indian stock exchanges under the name of Tata Motors DVR (Differential Voting Rights). These shares are designed to give shareholders a way to invest in a company's equity while having different voting power compared to regular equity shares.
DVR shares usually have lower voting rights compared to regular equity shares, allowing the promoters or founders to retain majority control over the company even if they hold a smaller portion of the overall equity.
However, post-implementation of the scheme, voting rights and economic rights of shareholders will become the same.
How does the scheme benefit Ordinary shareholders?
The proposed scheme will result in an EPS accretion of 4%, ensuring that their economic rights remain unaffected. Additionally, the scheme increases the free float of Ordinary shares by 18% and enhances the voting rights of public shareholders by 3.2%, according to the company's regulatory filing.
For Tata Motors, the scheme serves to streamline the capital structure and boost market capitalisation by eliminating discounts on "A" Ordinary shares. Notably, the scheme will have no impact on the company's debt position.
When did Tata Motors issue "A" Ordinary shares?
In 2008, Tata Motors issued "A" Ordinary shares at a 10% discount to Ordinary shares, which carried lower voting rights (1/10th) but higher dividends (by 5%). Subsequently, SEBI disallowed companies from creating new classes of shares with differential rights, affecting the market for new issuances. Existing "A" Ordinary shares were allowed to continue, making Tata Motors the only listed company with "A" Ordinary shares.
Further, the company also issued additional "A" ORD shares through a QIP in 2010 and a Rights Issue in 2015. The "A" ORD shares were also included in the index and F&O segments, resulting in improved liquidity.
However, the premium between "A" Ordinary shares and Ordinary shares has increased steadily. In 2010, "A" Ordinary shares were trading at a 10% discount to Ordinary shares (Tata Motors), and taking the previous closing price of ₹374.40, the discount went to 44%.
What are voting rights?
Voting rights refer to the right granted to shareholders of a company that allows them to participate in the decision-making process of the company. When individuals or entities purchase shares of a company, they become partial owners of that company, and each share they hold represents a proportionate ownership stake.
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