Shares of Tata Motors with differential voting rights (DVR) — also known as A-ordinary shares — rose 12.4 per cent on Wednesday, a day after the auto major announced conversion to ordinary shares.
Under the proposed plan, seven ordinary shares of the company will be issued for every 10 A-ordinary shares held and all its outstanding A-ordinary shares will stand cancelled.
Shares of Tata Motors ordinary shares and A-ordinary shares closed at ~640.6 and ~ 419.5 with a gain of 12.4 per cent and 0.2 per cent respectively.
As per the latest share prices and the swap ratio, the DVRs are still available at 6.5 per cent discount to the ordinary shares.
A day earlier, this discount was 20 per cent.
Those holding the cheaper DVRs stand to pocket the arbitrage gains, however, the scheme will be completed in 12-15 months.
Tax implications
The transaction will have three levels of tax implications.
First, the cancellation of A-shares will be deemed as “dividend payout” on accumulated profits at Tata Motors when the scheme becomes effective. This will lead to withholding of dividend distribution tax.
Thereafter any money A-shareholders get after the deemed dividend minus their cost of acquisition will be treated as long-term capital gains tax.
Also, there will be a small element of short-term capital gains tax when the independent trust—setup to carry out this capital reduction scheme – will buy and sell shares to pay the withholding taxes.
P B Balaji, the chief financial officer (CFO), Tata Motors said the effective tax will depend on the date for the scheme and will also differ from the shareholders’ types.
The tax implication could be the lowest for mutual funds—who form the bulk of the A-shareholder base and the highest on foreign portfolio investors.
The effective swap ratio could be anywhere between 6.8 and 7 (shares for every 10 shares), Balaji said.
Tata Motors will require majority of the minority votes from both the DVR and ordinary shareholders for this scheme to go through.
“Since promoters’ voting rights are going down following the scheme. They actually have no say in this. From their point of view, they are just keen to simplify the structure. It will be completely a shareholders’ decision to decide how they want to take this forward. We believe the proposal is a fair one for both the shareholders,” said Balaji.
Tata Sons, which holds 7.57 per cent of the outstanding A-ordinary shares, will see their shareholding increase slightly in Tata Motors but voting rights get diluted by over 3 per cent upon completion of the scheme.
Balaji added most institutional investors are supportive of the capital reduction plan and the company will soon reach out to proxy advisory firms and retail shareholders to garner their support.
