DELISTING - THE NEW BUZZ WORD ON DALAL STREET

By Ruma Dubey

The markets are lackluster and the moods are despondent. Stocks move only to slip back down. But even in this market, there are a few breed of stocks, which seem to defy even the sense of gravity. And that special breed of stocks is the ones which are delisting or are ‘potential’ delisting candidates.

Yes, the buzz word on the streets today is delisting. In simple layman terms, delisting means removing the shares from trading on the stock exchanges. This delisting could be voluntary or involuntary. Voluntary delisting happens when promoters or the acquirers get the approval of the shareholders by a special resolution to delist itself. As per the norms, if public float goes down to 10% or below, the acquirer then has the option to buy the outstanding shares from the remaining shareholders at the discovered offer price. This gives an exit route for the investors but when it is delisting at the behest of the stock exchange, due to violation of norms, then investors are stuck. Offer price has the minimum base price or floor price, based on reverse book building. With SEBI’s stipulation to bring down promoters stake to 75% before 3rd June 2013, many companies, especially MNCs are preferring to delist rather than bring their stake down.

But this delisting, a win-win for the investor is proving to be quite expensive for the companies. AstraZeneca hit a new 52-week high yesterday at Rs.2489 and till even 1st March 2012, it was range bound between Rs.1945 and Rs.1855 and around 1st Feb was at Rs.1600 levels. Naturally when the floor price is based on reverse book building, the cost shoots through the roof.

This means, companies to delist now have to fork up much more than earlier and thus sometimes, delisting no longer remains an affordable option. For eg: last week, iGate Corp said that it is unlikely to be able to delist Patni Computer anytime soon because the high share price will make a buyback too expensive. In November, iGATE said it would seek to buy Patni's shares for a minimum of Rs. 356.74/share when the stock price, at that time was at Rs.388.65. It had allocated $215 million for the delisting. Post the delisting news, the stock hit  a new high at Rs.502.15 and is currently at Rs.470 levels. iGate does not want to pay more than Rs.450/share and today, given the run-up in the prices, that just does not seem like an option.

Another case has been that of Alfa Laval. Around 23rd of Feb, the company had given a floor price ofRs.2,045 and also indicated a price of Rs2,850. Based on the reverse book-building, the price stood at Rs.3,850. On 5th March, the company approved the delisting price at Rs.4000 per share. This means, the company will now have to shell out around Rs 820 crore as against Rs 417 crore which it had earlier set aside. This Rs.820 crore is more than its past 10 years' net profit of Rs.753 crore.

In Jan 2011, delisting plans of Kennametal hit a roadblock after shareholders rejected the company's share buyback proposal. It had planned to acquire the shares through purchase of 11.84% public stake or 26 lakh outstanding shares for Rs.514.98 a share. Its ten years accumulated net profit is at Rs.343 crore and to buy back at Rs.514.98/ share, it would have required Rs.133.89 crore. The stock on 5th March hit a new high at Rs.1198 and thus with expectations running high, like Alfa Laval the company will have to revise its price. BOC and Goodyear India, did not tender the required number of shares in the respective open offers, while promoters of Bosch Chasis did not accept the price discovered through the reverse book-building system. AstraZeneca too is another such case waiting to happen. Though it has refuted delisting plans, with 90% promoters stake it is bound to happen soon. Expectations are of a price of Rs.3200/share.

Yes, cost for delisting for MNCs has gone up but it is a good move, when one looks at it from the minority shareholders point of view. In the past, many companies raised funds from the market, earned profits and helped promoters prosper, before they eventually decided to delist. Minority shareholders were left high and dry but now with SEBI’s rule, making it necessary to receive shareholders' approval through the postal ballot method, shareholders have a say and delisting is thus not at the whims and fancies of the promoters.

With control now in the hands of the shareholders, expectations have shot through the roof and the feeling is that promoters will delist at any price. But if greed runs too high, promoters will be forced to look at other alternatives to meet the 75% compliance.

And as an investor, what should one do? Do not buy shares only because it is a delisting candidate, pay attention to its fundamentals also. If you are getting a good premium to the market price, tender the shares to the company. But nowadays, with prices shooting to new highs as soon as the delisting is announced, maybe profit booking is not a bad idea too. If you do not sell and stock gets delisted, then? You will continue to remain a shareholder and be eligible for benefits such as bonus, dividends and so on from the company. But it is like holding something illiquid. Best to just get out, at a price, whichever is higher – floor price or quoted price. Make the most of this current ‘delisting’ buzz.