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Stricter compliance requirements and easy access to private capital have made unlisted firms wary of listing, say experts. Between April 2012 and December 2014, 42 companies delisted from stock exchanges, while only 15 new ones entered the market, show data provided by Prime Database.
“Compliance costs have gone up and good companies prefer to go private rather than remain listed to avoid high costs,” said J N Gupta, managing director, of Shareholders Empowerment Services.
From an investor point of view, the trend of only a few companies entering the market isn’t healthy, as it leads to a “scarcity premium” say experts.
Some say the new Companies Act and the Securities and Exchange Board of India’s corporate governance norms have given a lot of powers to public shareholders, making companies to think twice before going public. “The power with minority shareholders has increased. Promoters are unable to vote and get their decisions through. Basically, the whole system of corporate democracy is being distorted,” said the head of a domestic advisory firm.
Gupta believes voting power to minority shareholders might not be a big deterrent for companies seeking to list. “Nowhere (in India) have I seen minority shareholders holding promoters to ransom. Promoters have always managed to get their way around,” he says, adding incentive structures such as lower taxation and higher credit ratings should be put in place to encourage companies to list.
More than apprehension about regulations, market conditions are what led to a dismal number of listings in the past few years, say experts. “It is a question of valuations. Through the past few years, the markets haven’t been very favourable for promoters to sell stakes,” said an investment banker, on condition of anonymity.
Experts say most companies wanting to delist have either been small or multinational ones
“Valuation is a function of how you see the future. Typically, delisting happens when the company expects profitability to improve and promoters see more strategic value in delisting at that point rather than in the future, when prices could rise,” said Nikhil Gholani, head of institutional equity, Tata Securities
An increase in the number of private equity players in the fund-raising space has also provided an alternative for companies seeking to raise funds. “Fresh issuances are lower because whoever can raise the initial capital through private equity is doing so. Eventually, these companies could look at listing. But that is only if the investment becomes mature,” said Nirmal Rungta, independent market analyst.
In 2014, overall private equity investments in India stood at $11.5 billion, through 459 deals.
