Introduction:-
Delisting a security will primarily change the primary mode of transacting in such security from Recognised Stock Exchange (RSE) to Over The Counter (OTC). This is not a simple process and will take more than 2 years in some cases owing to various regulatory concerns.
In this article, we will be discussing on the following:
✓ Process of Delisting
✓ Alternatives to Delisting
✓ Why do companies go for voluntary delisting
✓ Why vedanta announced voluntary delisting
✓ Chances of approval of the proposal
✓ What should the investors do
Process of Delisting:-
Delisting process will differ when a company’s securities are listed on both RSEs and company will delist in only one RSE (exit offer is not required here). Process of delisting in other cases is explained here in a nutshell:
* Resolution should be passed by board approving the delisting process and compliance w.r.t. security laws is to be certified by them.
* Before passing of board resolution, company should intimate about proposed delisting to concerned RSE and appoint a merchant banker to conduct Due-Deligence and submit report to RSE
* Approval from shareholders (for making in-principle application to RSE for delisting) is required by way of Special Resolution passed by postal ballot
* After above approval, application for in-principle approval should be filed with concerned RSE. Within one year from passing of Special Resolution, final application should be submitted to RSE
* Merchant Banker will perform reverse book building process
* Now, offer prices will be obtained from all shareholders
* Final delisting price will be the price where approval of 90% of share holders (in number of shares) is obtained
Alternatives to voluntary delisting:-
After going through the process of delisting, we can conclude that delisting is not just a single day’s process. Since the process takes substantial time, companies normally opt for delisting after considering following alternatives which may (in substance) result in same result as delisting:
# Increasing the promoter’s stake in company (which is now restricted to 75% for listed companies)
# Buy back of shares by companies from public (only a part of stake can be bought back, even that requires regulatory compliance)
Why do companies go for voluntary delisting:-
Companies normally go for voluntary delisting in following scenarios:
* Undervaluation of share by the market for a long period (Lower PE of stock when compared with industry)
* To utilise excess idle cash which could not be invested in short term in good projects
* To reduce the risk of takeover by external entities (where promoter’s holding is less)
* Responsibility of making the market happy (like regular dividends etc. so as to have an increase in the share price) is not required
* Promoters find current valuation attractive for increasing their stake beyond the permissable limit
* Chances of better valuation when the company is delisted (based on parameters otherthan those considered by market)
* Less regulatory compliance and related costs (like listing fee etc.)
* Delisting of shares may lead to increase in value of other securities listed ( like ADRs, GDRs etc.)
Why vedanta announced voluntary delisting:-
• Corporate Simplification (which it has been pursuing from several years) – Current Corporate Structure is complex and making the structure simple for an unlisted company is easy
• Delisting is expected to support an accelerated debt reduction program in the medium term and, in turn, support the Group’s highly attractive long term growth pipeline
• Restructuring an unlisted company will be easy due to reduced regulatory compliance
• Group is having $ 1.9 Billion principal repayment (over and above regular interest payments) in FY 21. Delisting will help to ease debt repayment & to give financial stability
• Fund raising through Strategic Buyout (SBO) is easy for an unlisted company when compared to a listed one
• Promoter found current valuation attractive for delisting:
– Floor price (Rs 87.5) is less than half of the Book Value (Rs 193) and Current Market Value is also far less than Book Value
– Lower pricing of stock due to low PE ratio (compared with industry PE of 7.89 and other rivals) despite regular dividends. Below image describes above situation:
Since current market price is less, delisting and paying off non-promoter holders will not result in huge cashflows
• Promoters expectation regarding acceptance of proposal:
Although floor price is less than market price after the news of delisting, promoters expect acceptance of offer (even for a higher amount) owing to following reasons:
– Huge borrowings by the company – since the industry is a capital intensive one, borrowings will be naturally on a higher side. Vedanta Group’s Borrowings as on 31st March 2020 were morethan Rs 45,000 Crores (which is more than current market capitalisation of 40,000 Crores)
– Since company is in need of funds and manpower for carrying out their business, company is expected to make fresh borrowings for running businesses
– Reduced demand in commodity market due to Lockdown and present Covid scenario
– Expectation of huge loss in FY21 Q1 and heavy debt may lead to lowering the credit rating of the company which may lead to decrease in share price
– Few weeks back, India’s biggest copper smelter plant of Vedanta was shut down owing to environmental concerns which has led to closure of copper division
Chances of apporval of the proposal:-
✓ Shareholding pattern of the Vedanta Ltd is pictographed below:
Percentage of number of shares required for
– Special Resolution is 67%
– Final delisting price is 90%
Promoters holding is about 51%. So, they need approval from around 16% of other holders for resolution and 39% for fixing final delisting price
✓ Retail investors are holding lessthan 10% of total shares. So, denial of delisting by retail investors alone may not stop the delisting process
✓ Share Price movement of past 3 years (as evidenced below) specifies that most of the FIIs & DIIs could have bought shares at a price higher than current market price.
So, they may not accept the proposal / may accept at huge premium price
What should the investors do:-
* As per SEBI Delisting regulations, shareholders who did not sell their holdings in reverse book building process may sell their holdings to promoters at the final delisting price within one year from date of delisting
* Delisting may be assumed as an evidence that promoters are confident about the future performance of their company in long term. So, holding shares even after delisting may provide huge returns.
* As mentioned above, retail investors do not have power to stop the delisting process. So, if the delisting is approved and final price is approved, holding shares even after delisting will have following impact:
– Low liquidity since sale is possible only throught OTC platform
– Investors may be required to make multiple offers to sell their stock
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