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Foundations

What Does “Delisting” Mean?

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On CNBC-TV18, I talk about Delistings.

Read our post on the Vedanta Delisting.

Here’s some notes.

Is delisting a bad thing?

It is a promoter taking a company off the listing in stock exchanges which means they don’t want to be bogged down by compliance issues, or want to do things that benefit the promoter alone, and therefore want the other shareholders out. Sometimes it’s because a PE fund wants to restructure the organization without being in the public glare, like in the case of Hexaware. This is not always bad for shareholders because they may be able to realize more value than the company is worth, because promoters pay a premium

How does the process work?

Delisting happens in phases. First the board says ok, then the shareholders have to say ok to attempting to delist. Then the promoter will try to get 90% holding, the min required to delist. For this a “reverse book building” is done, where every shareholder can say I’ll tender my shares but only if you buy at X price, where X is their bid. This is about a few days. If the promoter can get more than 90% by buying out all shareholders based on their bids, the delisting will be successful. Shares will go off listing within a month. Typically, end to end, the process takes 3 months.

If the promoter gets 90% of shares (including his own) but doesn’t like the price, he can give a lower price as a “counter offer”. To reject this, you as a shareholder must “untender” your shares otherwise they are deemed to be accepted at the counter offer price. If after the counter offer the promoter gets 90%, delisting happens.

If the promoter cannot get 90%, then the delisting fails.

Price discovery and How should you bid?

If you know your company, you can value it. Sum of the parts, DCF or using peer valuations can help. If you don’t know your company, you want to stay off the bidding until the last day, and then, bid at a price where most of the offers are at, so that you can get in at the highest price at which there are lots of bids.

What if you don’t tender?

That’s okay. At the “discovered price” that is, the highest at which the reverse book building succeeded to get the promoter 90%, the promoter must offer a 1 year window to all remaining shareholders. They can tender at any time within a year post delisting.

In DLF some people didn’t tender even in the 1 year window in the delisting about 20 years ago. They kept their shares throughout and when DLF came back to RELIST in 2006 or so, they exercised their rights issue through a court order and managed to make a good return on those shares post relisting.

What happened with Vedanta?

The promoter first cut the book value of the company before delisting so he could start at a lower price of 87. Most people were tendering at 150-160 but LIC, which owns a large chunk of shares, offered them at 320. This would have made it tough for the promoter to buy, but then, a lot of bids that were submitted were not complete, so the delisting failing to get 90% shares for the promoter. No shares were accepted and everyone got their shares back.

Now, investors should: consider the worse fundamentals of the stock now that the promoter has actually borrowed from the company’s subsidiaries. And consider what could happen if the promoter refuses to share the large cash in the subsidiaries through dividends. If that happens, there is no reason to hold this stock. Otherwise, the only hope is that there could be another open offer, but those hopes are tiny.

Retail investors should either know their company on piggy back on the institutions for advise on the bidding price. If you don’t know your company, you will be running blind, so you’re going to need help.

Are MNCs good delisting bets?

MNCs – all their delistings are good for shareholders. Digital equipment in the early 00s gave a 100% premium to the stock price. More recently, Hexaware which started the process  at Rs. 265 has decided to buy shareholders out at Rs. 475. So its not necessarily a bad thing, and if retail investors held the stock, they got a good offer. Linde India was one where the price discovered was too high and it failed because some institution wanted too much of a price. The price collapsed since.

Knowing that they will have to pay a hefty premium, many MNCs do not try to delist at all. In general, betting on a delisting is a bad idea. In fact, most delistings manage to push the price of the stock up so much that it may be better to sell in the market than to wait, so a retail shareholder should be aware of that and sell in the market when the price is too high.