Tata Motors issued dividend-paying variety (DVR) shares to pay off debt, but they have traded at a high discount of around 49% compared to ordinary shares. While DVRs were intended to attract passive, long-term investors focused on dividends, the high discount suggests investor concerns about dilution, governance, and limited takeover rights for DVR holders. However, Tata Motors has few such issues to justify the discount. Increased holdings by passive institutions over time have also coincided with a wider discount, supporting the view that DVRs attract more passive investors who provide less liquidity and drive down prices. Measures like share buybacks or dividend increases are suggested to help narrow this unwarranted

1. Efficient Market Hypothesis
TATA Motors
-Tushar Gupta

2. History of DVRs
• Issued DVR to pay off debt
• Starting price Rs 305/-
• ~10% discount on ordinary shares

3. Discount Range
• Average discount of 31% over a span of 3 yrs
• More than 35% since Dec 2010
• Currently trading at 49% discount
• No effect of splitting

4. Idea of DVR
• Higher dividend + Low Price in lieu of rights
• Instruments for passive investors
• Investor interested more in dividend
• Money blocked for long term
• Is this nudge?

5. Another Theory
• DVRs are small part of any takeover bid
• A high price of DVR would seriously skew
valuation

6. Discount Drivers
• Dilution fears
• Corporate Governance Issues
Since Tata Motors has
• Lowering of Dividend none of these issues, it
seems likely that the
high discount is
• Fear of Takeover unwarranted

7. Shareholding Pattern
• Major chunk held by Institutions
• Increased from 50% in Sep-10 to 76% in Sep-11
• Discount increased from 29% to 44% in the same
period
• This is in sync with the passive investor theory
 Passive => Less Liquidity => Lower prices

8. 20%
40%
60%
0%
-100%
-80%
-60%
-40%
-20%
1
16
31
46
61
76
91
106
121
136
151
166
181
196
211
226
241
256
271
286
301
316
331
346
361
376
391
406
421
436
451
466
481
496
511
526
541
556
571
586
601
616
631
646
661
Overall trend (as of 30/11/11)
676
691
Series1

9. 20%
40%
60%
0%
-100%
-80%
-40%
-20%
-60%
1
16
31
46
61
76
91
106
121
136
151
166
181
196
TATA Motors
211
226
241
256
271
286
301
316
331
346
361
376
391
406
421
436
451
466
481
496
(as of 30/11/11)
511
526
541
556
571
586
Pantaloons
Pantaloon vs TATA Motors
601
616
631
646
661
676
691
Series1
Series2

10. Comparison…
• Similar market comparison between Pantaloon and
TATAMTRDVR
• Both show mostly similar trends
• Spike in Pantaloon post 23/11 – FDI news
• High probability of discount coming down
Markets are semi-efficient in this case

11. Conclusion
• No particular bad news
• Split but no effect on price or discount
• Passive institutional investments hurt prices
Short TATAMOTORS and Buy TATAMTRDVR

12. Suggested measures for TATA Motors
• Buy back DVRs
• Exchange for Ordinary Shares
• Increase DVR dividend