Delisting of Indian companies from stock market

The delisting of companies has started hitting the stock market at a time when the Sensex has almost lost 24% in the last one year. With Sensex falling by 24%most of the stocks have come down drastically and are available at very low prices. This also offers an opportunity for those companies who are looking to delist themselves from the exchange. After delisting from the bourses, a company can re-list its shares only after a period of 10 years. We, at DSIJ, would like to highlight some of the major points about delisting and put forward our views on whether it is a good or bad opportunity for the investors.

Delisting is of two types: one is voluntary and the second one is a forced by the stock exchanges. Investors should always remain cautious while investing in forced delisted stocks as they will not attract investors and the prices will go down substantially so that a shareholder may end up getting a poor deal as the 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. A delisting of the company means that its wants to permanently remove itself from the market. But why do companies go for delisting? Here are the reasons: 

• The promoters of the company want to increase their stake in the company. This implies that the promoters would like to have more freedom to make decisions which are confined because of the listings norms and regulations for listed companies.  
• Sometimes a company feels that the current underperformance of the stock is not justifiable and it feels that the cost of funding is high compared to other instruments. This can be to raise funds through other routes of equity dilution such as through private equity or private placements of shares at better prices.

When a delisting announcement is made by a company, investors start buying that stock on the expectation that the company will exit the stock at a premium to the current market price. However, this does not happen all the time because a 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 are above the company’s offered price, it may also cancel the delisting. If it gets cancelled the stock price can come down as fast as it soars on the delisting date.

What we believe is that 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 companies go for delisting if the stake exceeds 90% as compared 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 to a downside once the upper price is decided. Therefore, this will be a great opportunity for those who hold the shares before the announcement is made by the company.

In Sep 2011, Mahindra Satyam announced a plan to delist from the New York Stock Exchange (NYSE), citing its inability to comply with the 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 to the same. It all depends on the price, how good the fundamentals are and the future prospects of the company. Tender the shares to the company if one is not sure about the future prospects 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 than holding them for a longer period. However, if the delisting does not take place or the price is not fair, a shareholder can hold on to the stock on the assumption that the company may come up with a better offer if the shareholders do not give back the requisite shares at the first instance. The revised offer price may give you a better opportunity to exit.