Delisting involves removing a company from the list of entities traded on the stock exchange.
Complete article ripped from
http://www.thehindubusinessline.com/iw/2010/06/27/stories/2010062751271200.htm
Complete article ripped from
http://www.thehindubusinessline.com/iw/2010/06/27/stories/2010062751271200.htm
Anand Kalyanaraman
Several ‘delisting' related news articles were seen in business papers the past few weeks. This was mainly due to the recent 25 per cent public shareholding norm in listed companies stipulated by the government which raised speculation that many listed MNCs in India that do not meet the shareholding requirement would prefer to delist.
Consequently, many such MNC firms gained smartly on the bourses in the hopes of investors getting a neat premium on current prices, in the event of the delisting process going through. In fact, speciality gas maker BOC India's delisting proposal on June 15 — the first after the new shareholding norms — saw the scrip jump 20 per cent that day.
So, what is delisting and why do shares react the way they do on delisting rumours and announcements?
As the name suggests, delisting involves removing a company from the list of entities traded on the stock exchange.
Post this, a public company becomes a private one. Delisting can either be voluntary (where the company chooses to go private on its own accord), or compulsory (where the stock exchange removes a company from its list for violation of rules and regulations or trading parameters).
It is the generally the former which sees significant market interest and a rapid run-up in the prices of the concerned stock.
While voluntary delisting may help shareholders of companies whose stocks have suffered unwarranted sharp declines, critics point out that delisting prevents shareholders from participating in the future growth of companies.
Key rules
Delisting in India is governed by regulations issued by SEBI in 2009, which replaced the earlier delisting guidelines of 2003, and tightened the norms in favour of public shareholders. Under the new regulations, companies seeking voluntary delisting need to obtain prior approval (by postal ballot) of at least two-thirds of the public shareholders, for the board resolution seeking delisting.
Also, the base offer price (the minimum price) has to be computed taking into account the average of weekly high and low closing prices for the last 26 weeks or the last two weeks, whichever is higher, preceding date of notification to the stock exchange.
For the offer to be successful, the promoter stake, post the completion of the process, should become more than 90 per cent, or more than the aggregate of pre-offer promoter holding and 50 per cent of the offer size, whichever is higher.
Translated, this means that companies with pre-offer promoter stake of less than 80 per cent need to take the promoter stake to more than 90 per cent.
On the other hand, companies with pre-offer promoter stake of more than 80 per cent need to be successful in at least 50 per cent of the offer to the public shareholders.
The regulations also provide that promoters should not use the company's funds for the delisting process. This implies that the funds for delisting would have to be arranged by the promoters.
Reverse book-building
One of the key processes involved in voluntary delisting is ‘reverse book- building'. This is quite similar to the book-building process employed by companies at the time of public issues.
The key difference is that, in reverse book-building, instead of placing bids for buying the stock, shareholders place bids (at or above the base offer price) for selling the stock.
The price at which the maximum number of shares is offered by the public shareholders is known as the discovered price, which becomes the basis for determining the final offer price.
It is important to note that promoters are not bound to accept the equity shares at the offer price determined by the reverse book building process. This could happen if the promoters find the final offer price unrealistic.
In such cases, the delisting process falls through. In fact, the regulations laid out in 2009 are said to be quite onerous and have made delisting easier said than done. As a result, several delisting proposals have been unsuccessful.
Instances in the recent past include Goodyear India and Suashish Diamonds. Reasons for delisting offers falling through include promoters rejecting the ‘discovered price' or failure to raise the promoter shareholding to levels specified in the delisting regulations.
Taking positions in shares on the basis of delisting rumours and proposals can be fraught with risk. This is because although the run-up in share price can be quite steep in anticipation of a high discovered price, the slide can be equally furious in case the proposal falls through.
The sharp price fluctuations in Goodyear India and Suashish Diamonds on announcement of the delisting proposal and its subsequent withdrawal bear this out.
Several ‘delisting' related news articles were seen in business papers the past few weeks. This was mainly due to the recent 25 per cent public shareholding norm in listed companies stipulated by the government which raised speculation that many listed MNCs in India that do not meet the shareholding requirement would prefer to delist.
Consequently, many such MNC firms gained smartly on the bourses in the hopes of investors getting a neat premium on current prices, in the event of the delisting process going through. In fact, speciality gas maker BOC India's delisting proposal on June 15 — the first after the new shareholding norms — saw the scrip jump 20 per cent that day.
So, what is delisting and why do shares react the way they do on delisting rumours and announcements?
As the name suggests, delisting involves removing a company from the list of entities traded on the stock exchange.
Post this, a public company becomes a private one. Delisting can either be voluntary (where the company chooses to go private on its own accord), or compulsory (where the stock exchange removes a company from its list for violation of rules and regulations or trading parameters).
It is the generally the former which sees significant market interest and a rapid run-up in the prices of the concerned stock.
While voluntary delisting may help shareholders of companies whose stocks have suffered unwarranted sharp declines, critics point out that delisting prevents shareholders from participating in the future growth of companies.
Key rules
Delisting in India is governed by regulations issued by SEBI in 2009, which replaced the earlier delisting guidelines of 2003, and tightened the norms in favour of public shareholders. Under the new regulations, companies seeking voluntary delisting need to obtain prior approval (by postal ballot) of at least two-thirds of the public shareholders, for the board resolution seeking delisting.
Also, the base offer price (the minimum price) has to be computed taking into account the average of weekly high and low closing prices for the last 26 weeks or the last two weeks, whichever is higher, preceding date of notification to the stock exchange.
For the offer to be successful, the promoter stake, post the completion of the process, should become more than 90 per cent, or more than the aggregate of pre-offer promoter holding and 50 per cent of the offer size, whichever is higher.
Translated, this means that companies with pre-offer promoter stake of less than 80 per cent need to take the promoter stake to more than 90 per cent.
On the other hand, companies with pre-offer promoter stake of more than 80 per cent need to be successful in at least 50 per cent of the offer to the public shareholders.
The regulations also provide that promoters should not use the company's funds for the delisting process. This implies that the funds for delisting would have to be arranged by the promoters.
Reverse book-building
One of the key processes involved in voluntary delisting is ‘reverse book- building'. This is quite similar to the book-building process employed by companies at the time of public issues.
The key difference is that, in reverse book-building, instead of placing bids for buying the stock, shareholders place bids (at or above the base offer price) for selling the stock.
The price at which the maximum number of shares is offered by the public shareholders is known as the discovered price, which becomes the basis for determining the final offer price.
It is important to note that promoters are not bound to accept the equity shares at the offer price determined by the reverse book building process. This could happen if the promoters find the final offer price unrealistic.
In such cases, the delisting process falls through. In fact, the regulations laid out in 2009 are said to be quite onerous and have made delisting easier said than done. As a result, several delisting proposals have been unsuccessful.
Instances in the recent past include Goodyear India and Suashish Diamonds. Reasons for delisting offers falling through include promoters rejecting the ‘discovered price' or failure to raise the promoter shareholding to levels specified in the delisting regulations.
Taking positions in shares on the basis of delisting rumours and proposals can be fraught with risk. This is because although the run-up in share price can be quite steep in anticipation of a high discovered price, the slide can be equally furious in case the proposal falls through.
The sharp price fluctuations in Goodyear India and Suashish Diamonds on announcement of the delisting proposal and its subsequent withdrawal bear this out.