 "Delisting of stocks: 25% shareholders' presence detrimental")
Though the prima facie proposed delisting norms seem to be positive and would hasten the process yet there are a few points which could be detrimental too which could make it difficult for retail investors to participate in the offer as well as make it almost impossible for companies to achieve delisting.
Earlier this year, the regulator had issued a discussion paper in which it proposed to revamp the formula for price discovery for delisting through a reverse book-building method.
The current framework, , promoters claim, is heavily skewed in favour of minority shareholders which makes taking a company back into private ownership extremely difficult. Sinha said companies should be able to delist in an honourable and fair manner, keeping in mind the interests of investors.
At a conference organised by the Federation of Indian Chambers of Commerce and Industry (Ficci) in October, Sebi chairman U K Sinha had said, "Work on new delisting regulations was at an advanced stage, adding the rules might be announced as early as November."
A delisting will be deemed as successful if at least 25% of the number of shareholders as on the date of the board meeting of the company for deciding the delisting had participated in the reverse building process. Alternatively at least 50% of the shares excluding the shares by top 10 public shareholders should have been tendered.
Arun Kejriwal, Founder, Kejriwal Research, an Advisory Firm, "The revised proposed guidelines for delisting are good in intent, however, seems to have some operational difficulties. The treatment of tax when shares are tendered in delisting against when sold in the market, makes retail participation fairly poor. Further the requirement of a minimum of 25% of shareholders participation for the success of delisting seems difficult in mid and large cap companies due to very large shareholder base. One hopes Sebi would be proactive in considering all these operational issues."
In the past successful voluntary delisting offers of DIC, Rico India, Jolly Board, Indo Tech and Denso, the level of participation of public shareholders has been in the range of 1,000 - 2,000 shareholders. This constitutes only 4 to 10% of the number of shareholders. It suggests that it could be virtually impossible to meet the threshold of 25% of number of shareholders, as is being proposed, said an equity analyst.
He added that many companies including multinational ones with large market capitalization typically tend to have a large shareholder base e.g. Reliance Industries; Tata Steel; ICICI Bank; Colgate, Bosch, etc. In such cases, it would be virtually impossible to delist if any such large shareholder base companies would decide to take that route.
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Retail investors' lack of interest in participating can also be seen from the fact that they are not able to digest the Volatility in the stock price if the delisting fails.DIC is a recent example of such failure where the market price had dropped from Rs 623 to 357 apiece.
Rather they prefer to sell in the open market or wait for the delisting to be successful and then tender their shares. Further, tendering of shares in the delisting process is treated akin to off-market transactions and consequently, the tendering shareholders do not get the benefit of lower capital gains tax.
Also the number of shareholders could actually constitute a small percentage of the shareholding of the company.
The alternate guideline of at-least 50% of the shares excluding the shares held by top 10 public shareholders have to be tendered for successful delisting also seems to be very stringent.
The current threshold of 90% shareholding for successful delisting is already stringent. Adding the additional condition will tantamount to increasing the number of shares to beyond 90% for a successful delisting. This proposal effectively prescribes an upward revised threshold whereby the 90% shareholding loses its sanctity.