Voltarra Power's ordinary shares trade at Rs 200 and its differential voting rights shares at Rs 110, with the same claim on profits and a slightly higher dividend. Why might the gap persist, and what would make a long DVR, short ordinary trade work?

The discount is the price of votes and liquidity, so it can persist for years, and the trade needs a catalyst such as a conversion or a buyback of the DVRs. While you wait, the pair earns a small carry of about 0.82% a year from the higher DVR yield. The discount narrowing to 30% would earn about 27% on the DVR leg; widening to 55% would lose about 18%.

Picture two tickets to the same concert, one with a seat and one standing. They buy the same music, but the seated ticket costs more and nobody calls that a mistake. A DVR holder gets the same dividends and the same share of profits, but gives up control, liquidity and index demand, and each of those has a price. Votes matter most in a takeover, where a buyer may pay a premium only to the holders who can deliver control. Thin trading makes the DVR costly to exit. And index funds, which buy the ordinary shares automatically, never buy the DVRs.

With equal money on each side, the long DVR leg collects 3.82% in dividends and the short ordinary leg pays the 2.0% dividend to the lender plus 1% to borrow. The net carry is about 0.82% a year, Rs 8.2 lakh on Rs 10 crore a side, which pays you to wait but will not make the trade on its own. The pair is neutral to the utility's fortunes: if Voltarra's profits fall, both classes fall together. What it is exposed to is the discount.

Each move in the discount changes the DVR's price relative to the ordinary share. Relative valueA trade that bets on the price of one security against another linked one, rather than on the direction of either. is the whole trade. If the discount narrows from 45% to 30%, the DVR gains about 27.3% against the ordinary; if it widens to 55%, it loses about 18.2%. A company decision can close most of it at once: if Voltarra converts each DVR into 0.8 ordinary shares, the DVR is suddenly worth 0.8 of an ordinary share and the leg gains 45.5%.

So the case for the trade is the case for a catalyst. Look for a board that has spoken about simplifying the share structure, a buyback aimed at the DVRs, an index rule change, or a promoter buying DVRs cheaply. Without one, the honest view is that a 45% discount is a fair price for what the DVR lacks and the trade is a slow, crowded carry position with a tail risk: in a takeover the ordinary shares can jump while the DVRs are left behind.