Tata Motors ‘A’ shares delisting offers 23% bonanza to DVR holders; here’s how investors can maximise gains

Tata Motors ‘A’ shares delisting offers 23% bonanza to DVR holders; here’s how investors can maximise gains

Tata Motors’ decision to cancel ‘A’ ordinary shares and swap those with ordinary shares offers the current ‘A’ shareholders up to 23% bonanza. Tata Motors seeks to simplify and consolidate its capital structure, which will cut the current number of equity shares by 4.2%. The board of directors approved a scheme of arrangement, wherein shareholders that own 10 ‘A’ ordinary shares will be issued 7 ordinary shares as a consideration for the reduction. The swap ratio offers a 23% premium to the Tata Motors DVR shareholders over the share price difference at Tuesday’s close.How Tata Motors’ DVR shareholders can maximise gains

The spread between the two shares is around 20% currently (in favor to ‘A’ ordinary shares) holders; however, it will not be possible for new buyers to capture the 20% difference according to Nuvama research. Tata Motors ‘A’ ordinary shares opened with significantly higher gains today – up 15%, narrowing the spread. Nuvama suggested two possible scenarios for traders looking to take advantage of the arbitrage opportunities. If the spread between the two shares narrows to 8-10%, then existing DVR shareholders should unwind their current position and book profits. However, since the scheme will take between 12-14 months to come to fruition, the traders should set up a fresh position around 15% spread, Nuvama said.

Tata Motors DVR shares closed at a 43% discount to ordinary shares yesterday. At this discount, shareholders would be eligible for 5.7 ordinary shares for every 10 ‘A’ ordinary shares. However, Tata Motors’ swap ratio of 10:7 gives traders a 23% premium on Tuesday’s closing share price of ‘A’ ordinary shares. “The scheme will lead to a reduction in the outstanding equity shares by 4.2%, making it value accretive for all shareholders,” added the company in a filing with the exchanges. Axis Capital provided the Fairness Opinion to Tata Motors.

The scheme also envisages creation of a trust with an independent third party acting as a trustee, to operationalize the various actions required to give effect to the Scheme in accordance with applicable laws. The trust shall receive the ordinary shares issued by Tata Motors to the ‘A’ ordinary holders and will then issue the ordinary Shares as per the capital reduction consideration on a ‘net’ basis to the ‘A’ ordinary shareholders, post settlement of applicable taxes.