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The delisting blues

What you can do when the company you hold wants to opt out of the stock exchanges.

By Anand Adhikari | Print Edition: August 12, 2007

You may have made millions in new listings of initial public offerings, but an opposite phenomenon currently taking place-and turning quite profitable-is 'delisting' of shares. A delisting is triggered when the promoters' stake (usually companies with well-known foreign promoters with a listed subsidiary in India) in their underlying companies inches towards 75 per cent.

The regulations state that: A voluntary delisting clause is triggered if a company fails to maintain a minimum continuous public shareholding of 25 per cent. As most foreign companies have less than 25 per cent public float, the delisting clause comes into play (see Nuts & Bolts of Delisting).

Spot potential candidates

 

 
Atlas Copco India: En route to delisting?
But like any other investment, you have to spot the delisting candidate early on to earn handsome returns. For instance, Blue Dart Express became a potential delisting candidate soon after DHL Express, the world's leading express company, acquired a majority stake in November 2004. This express courier company soared a whopping 100 per cent after DHL bought stake. The Blue Dart stock gained 30 per cent to Rs 717 per share since the delisting buzz was confirmed in November 2006.

"Generally speaking, stocks react positively on delisting news," says S. Ramesh, Chief Operating Officer, Kotak Mahindra Capital Company. "One needs to look for the chances of non-public shareholding to go over 90 per cent and also the chances of large shareholders influencing the delisting price," he adds. "Investors should get in well-managed companies and seek adequate information about their companies before taking exposure," advises R. Swaminathan, Head (Mutual Funds), IDBI Capital Market Services. But given that many companies have a public shareholding that's below 25 per cent, the road to delisting looks rather busy (see The Other Way Out).

Nuts & Bolts of Delisting 

Definition
 
The term "delisting" of securities means permanent removal of securities of a listed company from a stock exchange (SE).

Difference between voluntary delisting and compulsory delisting
Compulsory delisting refers to permanent removal of securities from a bourse for non-compliance or when the promoter shareholding breaches the threshold of 90 per cent. In voluntary delisting, a listed company decides to permanently remove its securities from a bourse. If the promoter holding increases more than 75 per cent, it can go for voluntary delisting.

Exit opportunity for investors

SEBI (Delisting of Securities) Guidelines, 2003 provide an exit mechanism, whereby the exit price for voluntary delisting of securities is determined by the promoter of the company in accordance to book building process. The offer price has a floor price, which is average of 26 weeks of traded price quoted on the stock exchange, from the date public announcement is made. There is no ceiling on the maximum price.

Minimum lot

The minimum lot for acceptance is one share.

Selective delisting from regional stock exchanges

The company is under no obligation to provide exit offer because it continues to be listed on BSE/NSE and shareholders can exit any time by way of selling shares in NSE/ BSE.

Work Backwards

When the shareholding of a multinational promoter inches towards 90 per cent (like Atlas Copco 83.77 per cent, i-flex Solutions 80.64 per cent, Timken 80.82 per cent), it's time to start doing the math. "Identifying these companies can offer shareholders an alternative path to exit the stock at higher than market price and also huge arbitrage opportunity, since the offer price is usually higher than the market price," says a recent Edelweiss Capital report.

Another thing to look for is the outlook for the broader market. Stay away if there is a possibility of an imminent fall or if the valuations are at their peak. On the other hand, if the market appears stable, calculate the likely offer price. SEBI regulations stipulate that the minimum exit price for voluntary delisting as the average of preceding 26 weeks from the date of public announcement. "Investors can also add 20-30 per cent control premium over that as investors are giving away the control to a foreign partner," says a research analyst with a domestic brokerage house.

 
Asit Koticha
Asit Koticha
Asit Koticha CMD/ ASK Securities: "Arbitrage opportunity is there for well-informed investors in delisting space but small investors should always keep away"

Hold on, if not satisfied

If a company breaches the 75 per cent shareholding mark and approaches the market for delisting, there is no surety that it can require all of the balance 25 per cent from the market. "You can adopt a strategy to sell shares in lots," says an investment advisor. Also, always exercise your option towards the last date of the offer.

Play the Arbitrage Game

You can wait till the announcement of open offer if your risk appetite is high. In fact, arbitrage opportunity arises when the open offer price is higher than the market price.

Agrees Asit Koticha, Chairman and Managing Director, ask Securities: "The only way I look at it is the arbitrage opportunity for well-informed investors in delisting space but small investors should always keep away."

Stay Invested?

If you are an existing shareholder and you want a higher price, there is a window to stay invested in a company as a minority shareholder. By exercising this option, you lose the 'liquidity' and also the luxury of getting the information on regular intervals from stock exchanges. "There is nobody to govern. It's a very risky proposition," says Koticha. However, the open offer post-delisting is on for a maximum of one month. In case the investor does not opt for surrendering his shares, he is entitled to regular dividends and bonus shares. But as there's no market post-delisting to determine fair price, investors need to re-assess the last option closely before deciding.

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