Delisting of Indian companies

Delisting of the company has started hitting the stock market at the time when Sensex has almost lost 24% in last one year. With Sensex falling by 24% most of the stocks have come down drastically and are available at very low prices. Well this also offers an opportunity for those companies who are looking to delist themselves from the exchange which would have cost them most to do buyback at higher levels

Indian companies listed on stock exchanges are looking to delist themselves from the market.  We at DSIJ would like to highlight some of the major points on delisting and put forward our views whether it is a good opportunity or bad for the investors. After delisting from the bourses, a company can only relist its shares after a period of 10 years.

Delisting is of two type one is voluntary and second one is forced one by stock exchanges. Investors should always remain cautious while investing in forced delisted stocks as it will not attract investors and prices will go down substantially. And shareholder may end up getting a poor deal as price will be decided by the exchange. The forced one can be because of not complying with regulations and policies laid down by the regulators.

Delisting of the company means that its wants to permanently remove itself from the market. But why companies go for delisting? 

• The promoters of the company want to increase their stake into the company. The promoters would like to have more freedom to make decisions which are confined because of the listings norms and regulation for listed companies.  
• Finding it difficult to adhere with the listing regulations and norms. And does not want shareholders approval on the same.
• Sometimes company feels that the current underperformance of the stock is not justifiable and it feels that the cost of funding is high compare to other instruments. Which can be to raise fund through other routes of equity dilution such as through private equity or private placements of shares at better price

What to do when a company announces delisting

When a delisting announcement is made by the company investor’s start buying that stock expecting company will exit the stock at the premium to the current market price. However this does not happens all the time because company may not give premium to the investors by reserving its rights during the reverse book building process which is what happened in the case of Cadbury India. When shareholders bid with higher prices which is above the company’s offered price than it may also cancel the delisting. If it gets cancel the stock price can come down as fast as it soar on the delisting date.

What we believe is one should buy these stocks only if there is some genuine reason and intent shown by the promoters to delist the company. This can be known by tracking down the changes in the promoters holding because most of the company goes for delisting if the stake exceeds 90% to the total shareholding. And make sure that this has not been factored out otherwise it won’t give much return to the investors and also may lead downside once the upper price is decided. Therefore this will be a great opportunity for those who hold the shares quiet before the announcement made by the company.

In September 2011, Mahindra Satyam announced plans to delist from the New York Stock Exchange (NYSE), citing its inability to comply with US market norms. This led to its share price (listed ADRs) falling by 24% on the NYSE that day. 

The question that arises is whether investors should give away the stock or hold on with the same.

This all depends on the price, how good the fundamentals are and future prospects of the company. Tender the shares to the company if one is not sure on the future prospect or growth of the company. And if the delisting happens for sure at fair value then give away the shares which will make more sense rather holding it for longer period. However if  delisting could not take place or price is not fair than shareholder can hold on to the stock, on which company may come up with a better offer if shareholders do not give the requisite shares at the first instance. The revised offer price may give you a better opportunity to exit. 

Can one continue to hold the shares after delisting?

And if an investor continues to hold the share after the delisting than the shareholder will receive dividends and retain the rights to cast votes at the shareholding meetings.  To unload the shares one can return it to the promoters within one year from the delisting date. As per SEBI Regulation Company has to accept all the shares at the price given at the time of delisting.

However, after one year, you would be stuck with the shares and have few options to get rid of them. Rarely do firms relist shares after delisting, in which case you can trade them in the secondary market.

The ongoing delisting of shares