The Curious Case of Pantaloon DVR

Pantaloon Retail has a DVR (differential voting rights) outstanding which carries 1/10th of the voting rights enjoyed by the equity shares but also enjoys 5% more dividend rights than the common stock.

As of this writing, the stock sells at 163 and the DVR sells at 98. That’s a discount of 40%.

On 8 February, the company announced its intention to change the terms of the DVRs (called Class B shares). It is now proposed to increase the voting rights from 10% of those enjoyed by the common stock to 75% and to reduce the incremental dividend over the common stock from 5% to 2%. The explanatory statement states that “markets and investors have discounted Class B Share’s value beyond reasonable discount levels…” and “in order to help shareholders of Class B Shares, to achieve proper pricing for such shares and also to enhance the shareholder’s value, it is proposed to alter/modify the rights and interests of Class B Shares, with regard to voting rights and additional dividend entitlement, with a view to realize and unlock the true value of Class B Shares.”

See the actual text of the explanatory statement below:

Pantaloon Retail is traded in the F&O segment.

How should one think about this development?

Will the discount on the DVRs narrow because of this development? Why or why not?

How much money does the company stand to save by reducing the incremental dividend from 5% to 2%? What do you make of that?

32 thoughts on “The Curious Case of Pantaloon DVR

  1. L.J says:

    Not sure if this is the right way to look at it but here goes..

    Lets say the share price has 2 components:
    1. Value ascribed by the market to its voting rights(call it x)
    2. Value ascribed by the market to its economic rights (call it y)

    then x+y = 163

    for the dvr shares,
    voting rights are: 0.1x
    economic rights are: y + (value of stream of dividends of 5%)
    the stream of dividends of Rs. 0.10 per share (5% of FV of Rs.2) for perpetuity can be estimated at Rs. 1.00 (discounted at 10%, for ease of calculation)

    so dvr shares should be valued at
    0.1x + y + 1 = 98

    solving for x and y, we get x = 73.33 and y = 89.67

    after the proposed change, value of dvr shares will be
    0.75x + y + 0.6

    voting rights get diluted by around 5%, so x may be reduced to 73.33*0.95=69.66, before substituting
    this will result in a share price of Rs. 142.52.

    so mkt price of class b shares should increase to around 142 while equity shares should fall slightly to Rs. 159, so the discount should narrow.

    As for the money saved due to reduction in dividend, the saving will be Rs. 9.56 lakh which doesn’t seem significant compared to total dividend paid by the company.

    • akijain says:

      nicely done..:)
      but i think you assumed value of x to be a linear function of voting rights which my not be the case . as 75% looks much more lucrative than 10 %.

    • L.J says:

      at any rate, i think the discount is unlikely to widen further after the proposed change. so selling equity shares futures and buying class b shares might be an interesting trade in this case.

  2. akijain says:

    or one can explain like this :
    4 dvr shares = (rs 400 – 8% dividend) functional equivalent of 3 ordinary shares worth 489 .

    since the decrease in incremental dividend is small as compared to increase in voting rights , the discount should get narrow .

  3. Rahul Yadav says:

    Discount should fall by 50%, wonder if Tatas try the same thing tith the Tata Motor DVR

  4. Pantaloon Retail has 1.59 crore Class B shares. Dividend for FY11 on these shares was Rs 1 per Class B share (50% of face value of Rs 2) and Rs 0.90 (45% of face value of Rs 2) per ordinary share. So, for Class B shares, total dividend outflow was only Rs 1.59 cr.

    The company now proposes to increase voting rights on Class B shares and to reduce their right to incremental dividend from 5% of face value to 2%.of face value. That’s a saving on dividend outflow of Rs 0.06 per Class B share, or a total of ONLY Rs 9.5 lacs a year!!!


    At Rs 162.55 for the ordinary shares, their market cap at present is Rs 3,300 cr and that of class B hat Rs 98 is Rs 156 cr. If there was no discount on Class B shares, their market cap should have been Rs 258 cr, or higher by Rs 102 cr – lets say Rs 100 cr.

    The company states that it wants to remove/reduce the discount. If the discount is to be eliminated, the class B shareholders would be richer by about Rs 100 cr. That’s seems like a noble idea. But to achieve this objective, why is the company taking away Rs 9.5 lacs a year as incremental dividends? What difference would saving a minuscule Rs 9.5 lacs make?

    Let’s see. Rs 9.5 lacs of forgone tax free dividend income every year, using a post-tax discount rate of 7.8% p.a. (equivalent to 12% p.a. pretax with a 35% tax rate), is worth Rs 1.2 crores. That’s the value of perpetuity of foregone dividend.

    So the company is making Class B shareholders poorer by Rs 1.2 crores, giving them extra voting rights and it expects the stock market to increase the value of Class B shares by up to Rs 100 cr.

    Do you think Mr Market will oblige?

    • L.J says:

      With the dvr shares of pantaloon, tata motors trading at such discounts, doesn’t it mean the market is giving a lot of importance to voting rights?

    • student241 says:

      Sir, I have another way to look at it…
      Why do we hold equities as minority shareholders??? …. To get part of profit & to have a say in the decision making of the company. (Can’t think of any other reason)…

      Now compare DVR with ordinary shares.. DVR will get slightly more dividend & have 3/4th of voting power.

      So,DVR has to sell atleast at 75% of ordinary share’s price (ignoring value due to higher dividend). Currently the discount is 40% & hence it should narrow to atleast 25%.

      • DVRs do not HAVE to sell at 75% of ordinary shares. There is no law which requires that to happen.

        And let’s not forget another reason for the discount on DVRs which is their illiquidity. The DVRs have a market cap of only 156 cr compared to the market cap of Rs 3,300 cr. of the ordinary shares. That reason is not going away by the proposed changes.

        I would argue that even if the voting rights on DVRs were BETTER than those of the ordinary shares and in addition they enjoyed 5% extra dividend, the DVRs may still sell at a discount to ordinary shares simply because of their illiquidity.

        The reason the discount in DVRs is not only because the instruments are somewhat inferior to the common stock so far as their voting rights are concerned. The discount exists, in my view, also because the extra dividend is not large enough to induce enough common stockholders to switch from their current positions into the DVRs. Why are they not doing it? Illiquidity is the likely answer. Will they change their mind? Maybe they will. But I am not as confident as you are on that front…

        If the company was totally serious about eliminating the discount on the DVRs then it should have eliminated the extra dividend, equated the voting rights AND given the option to each DVR holder to convert each DVR into one common stock. Then this discount would have largely vanished even before such scheme was implemented.

        Watch what they do (or don’t do), not what they say…

      • student241 says:

        Agree, Sir, market rationality is not a law of physics.
        But for DVRs to sell anything below 75% of equity value will be a big irrationality, in my view.

        Liquidity is imp but holding an inferior thing just because its liquid is similar to something like playing a greater fool’s game.

        I strongly feel the discount between DVR & commons will converge to 25%… though it may take some time for Markets to correct this.

        • Aha! So now we have nailed down three reasons for the discount. Inferiority, Illiquidity, and Irrationality.

          Inferiority is going away on one account (more voting rights) but being somewhat offset by reduced economic superiority (lower incremental dividend).

          Illiquidity will not change.

          Irrationality- the wildcard about which one hasn’t a clue. Will it go away? Maybe it will. Maybe it won’t.

          I am just not as sure as you are🙂. But what you wrote is quite plausible.

      • student241 says:

        Agree, Sir.
        Also even if I say that irrationality will go away, I don’t know when. So time value of money may well give me negative real return.

        The best situation would have been if I was bullish on Pantaloon as business & then buy DVR & that’s it.. But that’s not the case with the underlying business in this case.

      • L.J says:

        i had overlooked the liquidity aspect before.

        but i have some more questions… if the ordinary shareholders can change the rights of the dvr security holders at any time, doesn’t that create an additional risk factor for the dvr, who have too few voting rights to protect themselves? would that add to the discount?

        I found the following clause in The Companies ((Issue of Share Capital with Differential Voting Rights) Rules, 2001 :

        9. the notice of the meeting at which resolution is proposed to be passed is accompanied by an explanatory statement stating:
        (a) …
        (b) …
        (c) the company shall not convert its equity capital with voting rights into equity share capital with differential voting rights and the shares with differential voting rights into equity share capital with voting rights;

        So it seems conversion is not really an option…

  5. akijain says:

    sir , but i can’t understand why promoters are diluting their ownership . what are their incentives ?

    • L.J says:

      Promoters are not diluting their ownership. They own 46.5 % of class b shares and after the change their overall voting rights increase from around 44.94 to 45.01%

  6. agrdin says:

    Is there any risk that this special resolution will not be passed?
    Does it require sebi approval?
    Can minority share holders of pantaloon object this resolution, since it may depress current price of pantaloon share?


  7. Ravi Purohit says:

    I think we’ve seen enough data in the past 2/3 years to suggest that DVRs trade at discounts irrespective of how much dividends they get or the voting rights they have! eg. Tata Motors, Pantaloon Retail et al. Prof bakshi, I’d agree with you – liquidity is one of the biggest reasons for the same. At a mcap of Rs.156 cr, which institution would want to hold this? Slowly but surely they seem to be getting out the Pantaloon DVR (e.g. Small cap fund in the Dec’ qtr). I think the only reason one would want to buy this is a). one is bullish on Pantaloon Retail itself…and that one’s holding period is longer (say 5 yrs or so)…by when hopefully the discount would narrow! Although, logically, the DVR’s discount to the underlying should narrow…and therefore a short on underlying and a long on the DVR makes sense….but as someone rightly said “markets may remain irrational longer than you can remain solvent”. tough call…if you are short of opportunities & a nice case study if you are a keen market observant.

  8. In the case of Tata Motors the promoters kept selling the DVRs and their holding has reduced from 84% to 16.5% or even lower. Post that we have seen a bit of narrowing of the discount recently as liquidity has increased and may reduce further once we see a higher dividend in this year making the yield better.

    For Pantaloon the promoters cannot increase liquidity🙂 as its just 156 cr market cap. So what they did is quietly increased their voting rights by half a percent. They gain if discount reduces as they hold a chunk of it. Even if the discount does not reduce their voting rights increase. Win-Win for them🙂

    I dont see any thing else.

  9. Sir, I would like to say that the only reason for such huge discounts in DVR valuations in India is pure irrationality. Lets take the example of TATA Motor DVR (TMD). At the time of issuance the company had sold DVR at 10% discount to underlying equity, with 1/10th the voting right. Whilst market irrationality had driven the discount to 50% of underlying , and now to slightly better number of 45%. As far as liquidity is concerned in TMD, theres’ hardly any issue with over 1 crore shares trading everday + F&O. The management too is not an issue as they happen to be exceptional, as with any other Tata management. In conclusion I would like to say that Panataloon management has taken a good step by trying to bridge the gap amongst regular and dvr shares. Tata Motors management too should take note of what Pantaloon has done, so that minority investors of TMDs interests are taken care. I would urge you Professor to take up the matter with other activist investors and approach the Tata management.


  10. I have written before about the Tata Motors DVRs. See:

    Illiquidity is not the reason for Tata Motors DVRs as the instrument has a market cap of more $1 billion. But persistent insider selling is a unique reason in Tata Motor’s case, which is not present in Pantaloon’s case.

  11. abhinav3175 says:

    The fundamental question in my view is wether we can ascribe a value to the voting right of a share. A DVR is like an immigrant in a democracy, never quite sure of his status. While on an average 1 of 2 of us choose not to exercise our franchise in a democracy, take the right away and suddenly democracy loses all meaning. Similarly, we may choose not to vote as a shareholder on a company resolution, but the right is still central. I am not sure wether any elegant financial model can ascribe a value to something so important to the nature of the instrument itself. My sense is that a DVR is akin to a perpetual, non convertible, floating rate, preference share. Infact its rights on the cash flow or liquidation proceeds is junior to that of an ordinary preference shareholder, which might be compensated through partial voting rights.

    I think that global benchmarks on DVR discounts are nothing but anchors (akin to holding company discounts) and thus it is difficult to say which will gravitate towards the other.

    In this specific case while the discount could narrow in the short run, am not sure if it can sustain especially given the not so great corporate governance standards..

    • Back in 1996, I used to write columns for a newspaper called “The Intelligent Investor.” Of the many columns I wrote, one was titled “The Intrinsic Value of Voting Rights.” There were no non-voting shares in India at that time.

      Read it if you like – if anything you will notice the naivety of a young writer who had to struggle to find a topic worth writing every week🙂

      It seems that my fascination for non-voting shares just doesn’t go away.🙂

      • agrdin says:

        Thanks Sir, nice article. Can you please post link of all/others available “Intelligent Investor” article. I have tried searching for it earlier but couldn’t find it. These articles does help in understanding the mechanics of investing and is easy to relate due to Indian context..


  12. Dear Mr. Bakshi,

    Here’s how I’m looking at it
    With common at 166 and dvr at 104, dvr’s are at a discount of c.38%
    If I short Common and Long DVR I get 1.6 DVR per common. If we look at the possible outcomes
    1.Price Falls
    a. Price of Common falls (say -25%) more than DVR (say -20%) will result in (124.8/83.2) 1.5dvr/common. Now I own 1.6 DVR per common>>Profitable
    b. Price of Common and DVR fall equally (i incur transaction costs)
    c. Price of Common falls less than DV, here we are assuming discount will widen further from current levels of 38%, which already is very high.
    2.Price increases
    a. Price of Common rises more than DVR: further widening of discount
    b. Price of Common and DVR rises equally: I incur Transaction costs
    c. Price of Common rises less than DVR: Profitable

    With already 38% discount, chances for further discount widening seems low Max discount was 45% which I found out please correct me if I’m wrong.

    I still wonder what will be the cost of maintaining this position if it takes a longer time to become profitable?? if you can provide some inputs here…

    Possible Market Risks which I can think of:
    Absolute price differentials. Let us say tmrw if the common price moves to 500 and discount to 40% with dvr at 300, well will get 300*1.5=450, which means a loss of 500-450=50 for just 2% of widening of discount.


  13. gandhijigam says:


    I believe the discount for DVR is not about valuation but more about liquidity and comfort.

    To substantiate that I would take examples of ADR, Many ADR,s were quoting at premium to its Indian price though they don’t have voting rights. It is more about liquidity for them and also Exchange rate issues, fungibility. (Depository of ADR have voting right but individual ADR holders do not have that)

    I would also draw your attention on uncertainty about the corporate benefits which may accrue in future. We can expect to get dividends, also Bonuses if any. but what about Rights issue ? How would be right given to DVR holders and at what price or Discount to Equity Price

    Globally DVR are quoted at a discount of 10 % to 25 % of shares depending on geography. The DVR discount to share have been between 40 % to 50% in India. There are many research reports which calls for reduction of discount vis – a – vis Equity (namely Telco DVR) but till date the steep discount still persist.

    Telco was planning to issue ADR for its DVR but that news was discounted by market and till date the discount of DVR have not fallen.

    We could have had an antecedence of DVR which have more than one vote. (Guj NRE coke was planning for it but SEBI did not allow for it.) Would such share trade at a premium of Equity price ? (Unless there is a takeover or control battle)

    We can also look at price of Jain Irrigation DVR , It was battered badly by Institutional share holders, now it has made a comeback (In terms of prices) and infact today Jain Irrigation did not move much but its DVR were up by 15%. Only because there was buying interest and no news.

    If we look at Pantaloon DVR they have tweaked the voting rights, which calls for revaluation of prices. But in last 9 months, the institutions have reduced their stake by almost 10 % (Promoters have not raised same amount of stake).

    The reduction in discount of DVR to Equity price of Pantaloon may happen but it will be time consuming, I don’t know if we can short Pantaloon Futures against DVR.

    Only if institution supports a lesser discounts or if Promoters enters the market we can see discount fall between DVR and Equity shares.

  14. Narayanan Ravindranathan says:

    There is some research done on control premiums of senior voting shares over junior shares across countries. Here’s some data I got from a book I was reading recently. The data show average control premiums in markets across the world.
    Rydqvist (1996) – Sweden – 12%; DeAngelo and DeAngelo (1985) – United States – 5%; Doidge (2003) – Foreign firm cross listed in US – 8%; Biger (1991) – Israel – 74%; Megginson (1990) – UK – 13.3%; Smith and Amoako-Adu (1995) – Canada – 10.4%; Zingales (1994) – Italy – 80%; Kunz and Angel (1996) – Switzerland – 18%.

    I wouldn’t read too much into it, but one thing that is clear is that in countries with weak securities laws the DVR discounts tend to be high. That probably explains the irrationality part in some way. In the case of Tata Motors the discount has substantially narrowed this month after Morgan Stanley peddled Tata Motors DVR as their preferred mid cap idea! Aside from exploiting certain technical anomalies like that, there will always be some discount which represents the fear of creative frauds. It is not exactly irrationality, but rather market participants’ difficulty to quantify what can be called a fraud risk premium. Since its tough to quantify, the market demands a wide margin of safety.

    Maybe we can think of DVRs as a play on returns from the underlying business + returns from improving securities laws. But that assumption would be under the realm of speculation.
    Also, I wouldn’t make transactions where I assume chances of discounts breaching historical highs are low. For example, even if Tata’s corporate governance is good, a rip off by Pantaloon would be enough to swing the discounts high in Tata Motors DVR. So the probability of discounts breaching historical highs is unknowable.

    In the Pantaloon case, Mr Market is probably viewing (maybe irrationally) this attempt by Pantaloon as a devious move to play with DVR prices only to pull some trick out of the hat later and might increase the fraud risk premium, offsetting logical economic gains.

    If I were the promoter I would swap 1 share of my holding with 1.33 DVRs and pocket 30 or so bucks. Then I can probably increase 75% to 100%. Probably the promoters already did that and that’s why we are seeing this 1/10th to 75% move. Jai Hind!

  15. Hi i just stumbled across your blog and would like your comments on Shoppers Stop and Organized retail’s valuation in India .. Pls read this as its going to be completely different from what you may have read anywhere .

  16. Sir,
    I case of demerger, are DVRs treated at par with ordinary equity shares? I think they are, but i am not 100% sure..(This is with reference to today’s AB Nuvo-Pantaloon deal)

  17. Neeraj, take a look at extract of Tata Motors DVR offer document (I think Pantaloon’s DVRs have virtually identical rights).

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