Here’s an idea:
1) Sell (short) 100 shares of TATA and buy 100 TATA DVRs.
You are now richer by 45,000 Rupees.
2) Wait.
3) The day you can sell the DVRs at a price roughly equal to that of the ordinary TATA shares, do so. Use the proceeds to buy TATA shares (cover your short position).
Here is how it works:
We assume the value of a security equals the present value of all future dividends. If this is in fact true, then the two shares of TATA, by definition, have and will continue to have equal value.
TATA motors makes Jaguars, Range Rovers and some other, lesser known cars.
The company’s ordinary shares currently trade at Rs 1000 or $22 in the US. TATA's DVR shares have 105% of the dividend and 10% of the voting rights. The DVRs currently trade at Rs 550.
In all other respects, the DVRs (Differential Voting Rights) are identical to the ordinary shares. It's fair to say the present value of all future dividends, for the DVRs, is by definition 5% higher. TATA has this to say about its shares.
While you wait, any dividends you need to cough up for the ordinary shares you shorted will be more than paid for by the dividends you receive for the DVRs.
If everything goes to zero and the sky comes falling… well you just saved yourself the trading cost of step No. 3; you’re still Rs 45,000 richer than you were.
All comments and questions welcome as usual.
No position, long or short.
