Investors in Suashish Diamond who did not sell at the floor price of Rs 220 would be rueing their luck. The share is currently trading at Rs 118.
Shareholders of Elantas Beck who exited the stock at the offer price of Rs 330 in January 2010 would be more upset. It is trading at Rs 1,816 or 5.5 times the offer price.
Two examples with completely different results. It is obviously very difficult for any investor to take a call on exiting/staying in a company when a delisting is announced. Elantas Beck's delisting plan flopped, as the company could not secure more than half of the 11.45 per cent non-promoter shares, even at the reverse book-building (RBB) price of Rs 600, considerably higher than the offer price of Rs 330 per share.
How to evaluate delisting as an investment opportunity? Ashish Kila, chief investment officer, Perfect Research, a Delhi-based boutique investment company, says investors should do some basic work before offering their shares. The focus should be on a few parameters such as price risk, management quality, multinational parentage, cues from prior corporate action, balance sheet, floor price and incentive to delist, shareholding pattern and time risk.
There are many examples where investors have checked a company's plans. The delisting proposal of Goodyear to buy back 26 per cent of the equity capital at an offer price of Rs 245 was rejected as the RBB price was higher at Rs 345. The company could not get the requisite 16 per cent shares below RBB to take the holding to 90 per cent. Goodyear is currently trading at Rs 310, above the offer price, but below the RBB price.
Companies may decide to delist for a variety of reasons that can be either good or bad for shareholders. Valuation comfort is probably the most important parameter to look at. If there is no valuation comfort and delisting fails, the downside risk is very high.
Delisting proposals by multinational companies (MNCs) have been on the rise. The latest being Alfa Laval, willing to buy its 11.23 per cent non-promoter shares by paying Rs 2,045 a share. The shareholders quickly showed their dissent on the floor price by moving up the share value by 20 per cent on the day of delisting announcement. The promoters, however, have set it clear by reserving a right under the delisting regulation to accept or reject any price discovered under the RBB process.
| STUCK DELISTING PROPOSALS | |||||
| Promoter share % | Offer price | RBB price* | Current price | Reason | |
| AstraZeneca Pharma | 90.00 | 825.00 | NA | 1,223.00 | Postal ballot rejection |
| Blue Dart | 81.04 | 825.00 | 950 | 1,605.00 | RBB price rejected by promoter |
| BOC | 89.48 | 225.29 | 600 | 313 | RBB price rejected by promoter |
| Disa India | 74.27 | 1657.00 | 2,960 | 1,509.00 | RBB price rejected in 2007 |
| Elantas Beck | 88.56 | 330.00 | 600 | 1,870.00 | Unsuccessful |
| Goodyear | 74.00 | 194.00 | NA | 288 | Postal ballot rejection |
| Kennametal India | 88.16 | 515.00 | NA | 842 | |
| Oracle Financial Ser | 80.40 | 2100.00 | NA | 2,115.00 | Not above Rs2,100 in near term |
| Suashish Diamond | 89.43 | 220.00 | 320 | 121.45 | RBB price rejected by promoter |
| * Reverse book building (RBB); all prices in Rs | |||||
MNCs wishing to delist are finding the going tough due to a sharp rise in the share prices of their Indian subsidiaries. In the past, many MNCs have announced their intention to delist, only to find share prices zoom, making the exercise much more expensive. A year before, AstraZeneca Pharma sought delisting but a postal ballot rejected this, with 78 per cent of minority shareholders dissenting. The share had surged 54 per cent over 13 trading sessions to Rs 1,361, while the minimum price was expected to be Rs 930-950. The company was unlucky for the third time.
Among pending delisting offers with promoters holding more than 80 per cent are Binani Cement, Blue Dart, Gillette India, Kennametal India, Oracle Financial Services and Timken India.
According to the Securities and Exchange Board of India, if the public shareholding slips to 10 per cent or less of a company's voting capital, the acquirer making the offer has the option to buy the shares outstanding from the remaining shareholders at the same offer price. If the delisting exercise fails, the company will be forced to reduce its shareholding, given the new rule of a minimum 25 per cent public holding.
