What is a DVR?
DVRs or differential voting rights are shares that carry different voting rights than ordinary shares. In this case, voting right for one DVR was equal to 10% of the voting right of an ordinary share and a 5% higher dividend. Therefore, 10 Tata Motors DVRs carry 1 vote.
Tata Motors was the first company to issue a DVR in India. It received a very underwhelming response where the underwriter JM Financial had to renegotiate terms with the company and the Tata Group had to pick up most of the stake which was up for sale.
DVRs also take a haircut in terms of price due to their lower voting rights, lower liquidity and the reluctance of shareholders which may need greater incentives to invest. This Haircut is the difference between the equity share price and the price of the DVR. In developed countries this haircut is lower. Higher liquidity and trading volumes also reduce this haircut.
Tata Motors DVR Dividends:
The DVR Holders receive a higher dividend on Face Value making the Dividend yield higher for DVR Holders.
|Tata Motors DVR
|Tata Motors Equity
Equity Share Price V/S DVR Price
A few things become evident by looking at the above chart:
- The % difference between the DVR and Equity share tends to move inversely with the equity share price. I.e. As the equity share price of Tata Motors falls, the % difference between the price of the DVR and equity share increases.This means that the price of the DVR has fallen at a greater rate in comparison to the equity share.
- The % difference between the price of the DVR and Equity Share is at a record high at 59.5%
- The average % difference between the DVR and share price since 2015 is 41.4%. . The range for the % difference is shown below:
|Tata Motors DVR Price
|Tata Motors Equity Share Price
- As the % difference increases, the return provided by the DVR in comparison to the equity share decreases.Since the % difference between the equity share price and the DVR is at a record high, now is a good time to consider investing in the DVR in place of the Equity share if one is looking to invest in Tata motors as Historical data suggests that the Equity Share Price and DVR % difference should converge to its average or at least decrease once the company starts doing better which will mean a higher % return for DVR holders in comparison to equity share holders and a much higher dividend yield.
If the company’s performance improves in the future, the DVR will provide greater capital appreciation to its holders.