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September 17, 2002
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What is delisting of shares? Why do cos delist?

Salil Panchal/ Morpheus Inc

Delisting of shares from Indian stock exchanges has become a major issue for the financial regulator and the finance ministry to tackle.

Almost every shareholder/investor has faced a scenario of having shares of a company that is seeking delisting from the stock exchange.

This is either when a substantial acquisition of shares by acquirer (where the public holding dips below requisite levels) takes place and an exit offer made, or through mergers/ acquisitions or compulsory delisting enforced by the stock exchange.

Investors also face the bane of being stuck with shares of a company that has not witnessed trading for years. Over the past two years, at least 26 companies, mainly multinational companies have delisted themselves from the stock exchanges, while another 90 other firms propose to do the same in coming years.

Why are several companies delisting themselves from the bourses? Should they be allowed to do so, while keeping shareholder and investor interest paramount? A Securities and Exchange Board of India-appointed committee has prepared a final draft report on the delisting of shares.

What does the committee actually recommend? How have investor rights now been protected? Which are the key issues facing shareholders of these companies? Let us take a closer look.

How critical is the issue of delisting of shares from stock exchanges by Indian companies?

As observed by the Sebi-appointed committee, delisting of shares has created uneasiness amongst investors. The ministry of finance has discussed this issue with Sebi and the possible negative impact on the securities market.

There are more companies today which seek delisting from stock exchanges due to various factors.

In which ways in can a company delist its shares from a stock exchange?

There are several methods to delist from the Indian stock exchanges. Companies may upon request get voluntarily delisted from any stock exchange other than the regional stock exchange for the company, following the delisting guidelines.

In such cases, the companies are required to obtain prior approval of the holders of the securities sought to be delisted, by a special resolution at a General Meeting of the company.

The shareholders will be provided with an exit opportunity by the promoters or those who are in the control of the management.

Companies can get delisted from all stock exchanges following the substantial acquisition of shares. The regulation state that if the public shareholding slides to 10 per cent or less of the voting capital of the company, the acquirer making the offer, has the option to buy the outstanding shares from the remaining shareholders at the same offer price.

A stock exchange may compulsorily delist the shares of a listed company under certain circumstances. In such a case there is no provision for an exit route for the shareholders except that the stock exchanges would allow trading in the securities under the permitted category for a period of one year after delisting.

In scenarios like mergers and amalgamations and under legal directions for sick companies under Bureau for Industrial and Financial Reconstruction, companies can be delisted.

So is delisting of shares always detrimental to shareholders? Can guidelines be created to restrict delisting of shares?

The argument presented is that large, profit making and financially sound MNCs have delisted its shares from SEs in recent years and this has caused some concern.

There is a perception within the financial markets that investors have not being adequately compensated for the permanent withdrawal of a good investment opportunity.

But it must be noted that companies have resorted to delisting due to depressed market conditions and subsequent acquisition of the remaining securities from the shareholders.

The current FII reforms also allow foreign companies to hold 100 per cent equity in key sectors and streamline operations for all holdings.

In the currently liberalised scenario it would be improper to create fresh entry and exit conditions for companies.

Listing and delisting are commercial decisions and should be based on business considerations. As long as the principles of adequate corporate governance, necessary approvals of shareholders and interests of the minority shareholders supported and followed, there should be no case against delisting.

An interesting fact is that a study of companies which have been delisted from the BSE shows that in 14 out of 29 companies (which have been or are in the process of being delisted from the BSE), the 52-week average was greater than the 26 weeks average.

The Sebi committee had compared the averages of closing highs and lows of 52 weeks with those of averages of weekly closing highs and lows for 26 weeks from the date of offer.

So what has the Sebi committee now recommended?

The committee has broadly stated that while there would be no restrictions on delisting per se, the monitoring of events leading to delisting (to safeguard investor interests) should be stringent and improved upon.

The committee has discussed issues like an exit price for delisting, adopting a reverse book-building process to determine this and taking steps to ensure that there is no scrip price manipulation while the process is on.

The following recommendations have been made:

  • The exit price for delisting should be in accordance with the book-building process;
  • The offer price should have a floor price (a minimum base price) which will be the average of 26 weeks traded price and without a maximum price;
  • Market forces will determine the price above the base price. Stock exchanges will provide the infrastructure to ensure transparency whereby investors can see the prices on screens;
  • To reduce risk of price manipulation, the scrip will be under watch by the exchanges;
  • Comprehensive provisions should include procedures governing the entire subject of delisting of securities of companies, and should cover cases in which companies on their own seek delisting of their securities from all or some of the stock exchanges, as well as those where the stock exchanges can compulsorily delist the securities of a company.

There are some new terms which investors/shareholders will have to keep in mind. Let us take a closer look at some:

What is the 'reverse book-building' process? And what will the exit price be? How does the process work?

You would have heard about the book-building process (The process of securing the optimum price for a company's share. The issuing company decides the price of the security by asking investors how many shares and at what price they would be interested in) which is adopted when a initial public offering or divestment is made.

Well, it is the same process. It is called the 'reverse' book-building process because the aim is to sell the shares (exit from the company) while in the case of the normal book-building the process is to buy the shares (and invest into the company).

The process which would be adopted would be similar to that adopted in the initial public offering process where is a book is kept open for a specific number of days.

  • The details like floor price, methodology to be adopted for an acceptable price, period of open offer) will be disclosed when the book-building process commences through the appointment of a merchant banker.
  • The floor price for the acquisition shall be specified but no ceiling price.

What will be the exit price recommended now?

The committee has recommended that an exit price concept should be adopted in line with that used for a normal book-building offer.

The delisting process, hitherto was possibly inadequate for investors in terms of the exit price mechanism used by the delisted companies. This exit price was based on the average of the preceding 26-week high and low prices.

This mechanism has not worked well in depressed Indian market conditions and the price arrived through this principle may not adequately compensate the shareholder for the permanent loss of investment opportunity, especially in a company whose shares are regarded as value investment.

It is now felt that the book-building process would provide the transparent and fair mechanism to price shares and would ensure investors' participation in the whole delisting process. It is assumed that rational investors would quote the reasonable premium in the book-building.

The committee has suggested changes to the calculation of the minimum offer price?

The Sebi committee examined alternative methods of arriving at a minimum offer price. Under the existing takeover code, an acquirer is required to make an offer to buy securities at the same offer price.

The principle to be followed is - whether the acquirer makes an offer to buy 100 per cent of the securities or reaches through several stages of acquisition a level of 90 per cent or more, he has to make an offer to buy the remaining securities at the same offered price.

In cases where there has been no acquisition of shares by an acquirer (who would be a majority shareholder or having management control), the average of 26 weeks closing highs and lows was being taken as the minimum price and the offer for delisting was being made at a premium to this minimum price.

The Confederation of Indian Industry representative argued against the norm practiced and has suggested that the regulator adopted the average of weekly highs and lows of either 26 weeks or 52 weeks as the minimum offer price.

So how does the Sebi committee report alter the scenario? Have the investor's rights been protected?

A section of industry and market experts we spoke to suggested that too much regulation was coming into the delisting of shares system.

Companies should be flexibility of operation. There is a strong case being made out to determine the case for listing and delisting. If some companies are not interested in public monies then they should be allowed to move out of the system.

In fact, the Indian experience has been different. Most companies - which have not performed well due to a variety of reasons - have preferred to remain listed and hence paid the price for doing so.

There is also a strong view that it is prudent to allow delisting than make an investor face problems like a company's shares not being traded for years or a cornering of shares (by select brokers, parties close to promoters) taking place.

In the overall picture of delisting of companies, the regulator should consider the fact that 7 of the 21 stock exchanges in the country did not witness trading in 2001-02.

Thus while the processes should be streamlined and transparency be ensured for investors, there should not be too much pressure on corporates or any further tinkering in the process.

The SEBI story
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