Alternative Investment Strategy

September 2, 2009

Advantage DVR
What is DVR ?

DVR (Differential Voting Rights) - These are equity shares with differential voting
rights and dividend benefits. A new concept for the investor community in India,
Scrip Name Tata Motors DVR’s has features different from normal equity holding.

Contract Size (Rs.) 850 Shares issued under differential voting rights are likely to be available at a
differential price, than the ordinary shares, as they carry a unique voting or
Cash Price (Rs.) 516.00 dividend benefit i.e. a company can have shares where the voting right is 1 for
every 10 shares and may have superior dividend pay outs say 5% over the normal
Future Price (Rs.) 503.10
dividend payout.
DVR Price (Rs.) 383.05 ƒ DVR’s allow investors to earn better return/higher dividends in lieu of
surrendering their voting rights.

ƒ It allows a company to raise money without diluting voting rights and thus
helps the promoters to defend against probable hostile takeovers.

The Companies Act permits a company to issue DVR shares, when among other
conditions; the company has distributable profits and has not defaulted in filing
NSE Symbol TATAMTRDVR annual accounts and returns for atleast 3 financial years. The issue of such shares
cannot exceed 25% of the total issued share capital of the company.
BSE Code 570001
In the anomaly to above SEBI vide its circular dated July 21, 2009, in its direction
Bloomberg Ticker TTMT/A to the exchanges, has asked them to amend the listing agreement, restricting
companies to issue DVR’s.

Tata Motors DVR

Tata Motors was the first company to issue shares with DVR’s in India. It had
come out with rights issue of Rs. 4,147 crores to repay part of the short term
bridge loan availed by its subsidiary for financing the acquisition of Jaguar-Land
Rover from ford.

These DVR shares carry 1/10th of voting right of ordinary shares ( i.e. DVR shares
to have only one voting right for every 10 shares held) and entitle the shareholder
of 5 percentage higher dividend as compared to ordinary shares.

The DVR issue was done by the company at a price of Rs. 305 about 10% less
than the issue price of ordinary rights at Rs.340. Trading in DVR commenced on
November 5, 2008 on both the exchanges.

Tata Motors v/s Tata Motors DVR’s Premium/Discount

125
75
25
Spread (Rs.)

-25
-75
-125
-175
05/11/08
14/11/08
23/11/08
02/12/08
11/12/08
20/12/08
29/12/08
07/01/09
16/01/09
25/01/09
03/02/09
12/02/09
21/02/09
02/03/09
11/03/09
20/03/09
29/03/09
07/04/09
16/04/09
25/04/09
04/05/09
13/05/09
22/05/09
31/05/09
09/06/09
18/06/09
27/06/09
06/07/09
15/07/09
24/07/09
02/08/09
11/08/09
20/08/09
29/08/09

Source: Bloomberg

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Alternative Investment Strategy
September 2, 2009

The price differential between DVR and ordinary shares has fluctuated from a
premium of Rs.90.00 to a discount of Rs.150.00 (30% premium to 32% Discount).

The DVR’s initiated with trading at premium and eventually started trading at
discount with in a month. Currently Tata Motors DVR’s were quoting at Rs.383.05
and Tata Motors ordinary shares were quoting at Rs. 516.00, signifying a discount
of Rs.132.95 w.r.t. ordinary shares. The difference between Tata Motors
September future and DVR is Rs.120.00 (Prices are as on closing on September
01, 2009).
Conclusion

We believe that the discount of Tata Motors DVR’s as compared to the ordinary
shares is steep and has a probable chance of it narrowing down.

The current price differential can offer a trading opportunity on the spread and one
can initiate arbitrage opportunity arising out of the significant discount.

Strategy

1) Long on Tata Motors DVR’s:

Investor bullish on Tata Motors can buy the DVR’s instead of the stock,
where in there could be an added advantage of the discount, as the
movement on the underlying would be reflected on DVR’s as well.

2) Arbitrage Opportunity:
One can initiate an arbitrage trade by buying 850 Tata Motors DVR’s and
simultaneously selling 1 lot of Tata Motors in future. As the discount
narrows down to a certain limit, one can reverse the positions. The below
table shows the returns at various convergence points.

Discount Days
Convergence
(Rs.) 15 30 45 60 75
5 21.76% 10.88% 7.25% 5.44% 4.35%
10 43.52% 21.76% 14.51% 10.88% 8.70%
15 65.28% 32.64% 21.76% 16.32% 13.06%
20 87.04% 43.52% 29.01% 21.76% 17.41%
25 108.81% 54.40% 36.27% 27.20% 21.76%
30 130.57% 65.28% 43.52% 32.64% 26.11%
35 152.33% 76.16% 50.78% 38.08% 30.47%
Karun Mutha 40 174.09% 87.04% 58.03% 43.52% 34.82%

Sr. Vice President& Head Derivatives Notes:

Tel +91-22-67897833
Email: Karun.mutha@hsbcinv.com ƒ The above returns are gross annualized yields.

ƒ No roll over costs have been considered.

Kruti Shah
ƒ The DVR’s have low liquidity & circuit limits, which is likely to
Derivative Analyst
Tel +91-22-67897830 make it move in a narrow range.
Email: Kruti Shah@hsbcinv.com
ƒ The discount/yields may vary based on the market perception
and time duration.

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