De-listing blues

GUEST COLUMN

does not want the de-listing guidelines to change.

At the outset, let me stress that this piece has been written in the belief that SEBI will always act with the larger public interest at heart as it has done in the past.

The delisting guidelines that SEBI seeks to amend will allow many long term wealth generating companies to de-list at prices that do not reflect their potential, and thus deny many retail Indian investors the opportunity to participate in the wealth creation that is taking place in their homeland and to which they currently have some claim.

It is my firm belief that the valuation arrived at by any agency may not discount the wealth creating potential of the firms. For instance, take the case of Gillette India as an example. As per the proposed guidelines, Gillette may be able to de-list in the band of Rs 1250-1500 (current price Rs 890), a price that is below what it was eight years ago when the company made large investments.

But consider the Indian demographics""with a 100-crore-plus population, 30 per cent earns above $1 a day, of which 15 crore are males. Plus, there are 3 crore of these who are affluent and can afford the premium shaving systems that Gillette is offering.

If they spend Rs 1100 a year, that translates into a yearly sales of Rs 3300 crore a year with Rs 600 crore of net profit, resulting in an EPS of around Rs 200 per share with strong entry barriers and virtually no capex (till sales of Rs 3000 crore). Indian shareholders will be forced to give up their shares even if they believe in Gillette's future, if the 90 per cent threshold is crossed.

Gillette is only an example. The prime candidates for de-listing will be the subsidiaries of multinationals, many of whom have had track records of long-term wealth creation by generating large free cash flows.

A chart from the book "The Future For Investors" by Wharton professor Jeremy J. Siegel illustrates the wealth creation over time when large free cash flows are generated. (see Returns to S&P 500)

Financial markets today rule the globalised world and the social responsibility of capital markets is to allocate resources in a manner which ensures reasonable long-term returns.

The failure of the social responsibility of capital markets is a failure of the vision to conceive the future. Beyond regulating the capital markets, I look upon SEBI as a custodian of the financial social capital of the country.

While not perfect, the previous guidelines allowed markets, and not agencies, to "discover" prices. If seemingly ridiculous prices were thrown up, it was a message for the companies to stay listed or a belief that the current profits were not representative of long-term profitability. With the new guidelines, the voice of the minority shareholders will not be heard.

Management guru Peter Drucker wrote that "The responsibility of society is to build up communities and citizens--their performance, their competencies and their productivity."

If the companies doing that are de-listed, what happens to future generations? From wealth-generating companies the capital market will be populated with wealth-demanding companies.

Sears, Roebuck & Company chairman and philanthropist Julius Rosenwald defined social responsibility as "you have to be able to do good to do well" and I'm confident that SEBI will do it that way. I believe that SEBI and particularly Mr Damodaran are very responsive to the needs of the community and therefore this request will be considered positively.