Tata Motors seeks shareholders’ approval for Rs7,500 cr rights issue

Mumbai: Tata Motors Ltd on Tuesday said it is planning to raise Rs.7,500 crore from existing shareholders through a rights issue, aimed at reducing debt and financing growth. India’s largest auto maker by sales revenue informed the BSE that it will go for a postal ballot to seek shareholders’ approval for the plan. Both ordinary shares and shares with differential voting rights (DVR) will be issued.

 Tata Motors’ DVR shares, first issued in 2008, carry less voting rights but fetch higher dividend. Analysts attributed the move to insufficient revenues from the company’s domestic operations in the last three years due to poor car, truck and bus sales. It also signals that Tata Motors’ UK subsidiary, Jaguar Land Rover Automotive Plc (JLR) will no longer be able to fund the ailing domestic business, given JLR’s own expansion and growth plans, analysts said. 

This will be Tata Motors’ first rights issue after the acquisition of JLR in 2008. The consolidated debt of Tata Motors, as on 30 September 2014, stood at Rs.60,773.67 crore. Of this, the domestic operations accounted for Rs.17,046.49 crore. JLR, which makes Jaguar luxury sedans and premium Land Rover SUVs, has been paying an annual dividend of £150 million to parent Tata Motors for the last three years. 

“It signals that Tata Motors can no longer rely upon the hefty dividend payout from JLR and will have to rethink its funding options,” said Mahantesh Sabarad, deputy vice-president, research at SBICAP Securities.

To be sure, in a bid to turn around its operations in India’s competitive car market where it has been ceding ground, Tata Motors has plans to launch a slew of new models till 2020 as part of its so-called Horizon Next strategy. It launched the Zest sedan in August 2014 and the Bolt hatchback on 22 January. 

It has also lined up a compact SUV and another small car, among other models in the ensuing months, company officials said on the sidelines of the Bolt launch in Mumbai. Meanwhile, JLR too has plans to introduce 50 new models over the next five years as it seeks to fortify its position in the luxury car market. 

The Whitley, England-based manufacturer has been stepping up its overall capital expenditure to fund its growth plans. The quantum, pricing and timing of the issue will be decided later, depending on market conditions, after approvals are received, the firm said. Sabarad said it would be interesting to see the pricing of the main shares and DVR shares. 

It’s a tricky situation,” he said as the company has to protect interests of both kinds of shareholders. “If the DVR shares are priced less than the average discount, it will irk the DVR shareholders and if it’s priced higher, the regular shareholders will be unhappy.” Subsequent attempts by the company to narrow the discounts between the two kinds of shares haven’t yielded any result and “possibly, even this time, it would fail”, he said. 

Since their listing in 2008, Tata Motors’ DVR shares have been trading at an average discount of 40% to the ordinary shares. Typically, companies issue DVR shares to guard against takeovers and dilution of voting rights while raising money. It also helps strategic investors who do not want control, but are looking at a reasonably big investment in a company.