Delisting Norms and Plays

Sometimes, at the start of the day, you think you would write a blogpost about say X. And then, you end up writing about Y. This is exactly what happened to me today.

I was building up a blogpost (in my mind) about some of the stocks that I’d like to invest in, but only if they correct. However, reading this blogpost by Neeraj (btw, wonderful blog – must follow!) kinda moved me to write about Delisting.

Delisting, in very simple terms, is nothing but taking a firm private. That is, a particular firm (say, Gillette India for example) will buy back shares from all its public shareholders and delist (simply put, get out of) a particular stock market. That said, what are the different norms that guide delisting in the Indian Stock Market?

  • A company can be delisted only if the promoter hikes its stake to 90 per cent or acquires at least 50 per cent through a share purchase offer aimed at giving the shareholders an exit opportunity. For example, if a particular company, say 3M India, with existing promoter stake of 76% wants to delist, they need to buy back 14% from the market. Alternatively, since 24% is remaining with other shareholders, they need to repurchase atleast 12% from them to delist from the Indian Stock Market. (What happens to remaining 10% or 12% as the case may be? Well, they can tender their shares to 3M till one year from the end of repurchase at the repurchase price).
  • The offer price for delisting will be determined by calculating the average of the weekly high and low of the closing prices during the last twenty six weeks or two weeks preceding the date on which the recognized stock exchange are notified (whichever is higher). Previously, the rule was restricted to the last 26 weeks. However, minority shareholders are at a disadvantage if the promoter wants to delist when the market is about to pick up (or say, the current scenario, where the last 2 weeks avg. price is bound to be greater than the avg. of the last 26 weeks). This prices is usually the floor price (as in, the minimum price that can be offered to existing shareholders). The actual offer price for voluntary delisting will be done through a reverse book building process (a posh name for price discovery of a stock which depends on the demand levels for the stock at different price points). This will be equal to or greater than the floor price.
  • A company cannot be delisted unless three years have passed since the listing or any instruments convertible into shares are listed. For example, if there are any convertible debentures (or FCCBs), the company cannot delist.
  • The promoters need to dispatch the letter of offer to all public shareholders not later than 45 days from the date of announcement. Besides, the date of opening of the offer should not be less than 55 days from the public announcement and the offer should remain open for a minimum of three days and a maximum of five days.
  • Successful Exit Offer: A delisting process is said to successful in the following condition – Post offer, the Promoter holding should reach the higher of the following: 90% of total issued shares or  Pre offer promoter holding + 50% of the Offer Size. Otherwise the offer  shall be deemed to have failed. Back to the example of 3M India, the delisting process is said to successful if the promoter holding is 90% or 88% (in case 3M India acquires 0.5*24% of non-promoter outstanding shares).
  • In a special provision for small companies, the shares of a company with up to Rs 1 crore paid up capital could be delisted from all bourses, if shares have not been traded for one year. Besides, if a company has 300 or less public shareholders and the paid up value of these shares is not more than Rs 100 crore, the shares could be delisted.

Ok dude, enough with laws, norms and regulations. What are the companies that can delist?

Delisting is an expensive process. Therefore, it is reasonable to assume that only those companies with promoter holding greater than 80% would be wanting to delist (only 10% to buy). Here are the companies listed on the Indian stock market with promoter holding greater than 80%.

Company

Promoter holding(%)

Astrazeneca Pharma

90

BOC India

89.48

Gillette India

88.73

Elantas Beck India

88.55

Kennametal India

88.16

Foseco India

86.48

Saint-Gobain Sekurit India

85.77

Fairfield Atlas

83.91

Atlas Copco

83.77

Tudor India

83.63

Ineos ABS (India)

83.33

SI Group-India

83.21

Honeywell Automation India

81.24

Blue Dart Express

81.03

Oracle Financial Ser Soft

80.56

Lotte India Corporation

80.39

Timken India

80.02

*Dilsa India also could come under this category. Neeraj’s post will explain that.

So, should I go and buy these out since they will delist at a higher price?

Not so soon.

Sebi rules are heavily loaded against the success of delisting offers since even a few key investors can block the deal if they do not approve of the exit price. There are two main challenges that companies wanting to delist face. The first is that there might not be sufficient response from investors for delisting as the price and the quantity of shares offered might not be acceptable to shareholders. Secondly, two-thirds of public shareholders need to give the management the go-ahead to delist.

Due to these reasons, the delisting of AstraZeneca Pharma and Goodyear India failed (and even Elantas Beck India, if I recollect). In AstraZeneca and Elantas Beck delisting, the floor price was way below the market price and the promoters rejected the price discovered by the reverse book building process. Delisting failed subsequently. The only two cases that I remember delisting being successful are Hindustan Inks and HSBC InvestDirect India.

(Here are the couple of posts where the wonderful Rohit Chauhan walks you through the Elantas Beck delisting (failed!) – Post 1, Post 2

Here are the couple of posts where the arbitrage guru, Ninad Kunder walks you through the HSBC InvestDirect delisting (successful!) – Post 1, Post 2)

Most of these businesses are extremely well run, with good revenue growth and capital ratios. Some of these stocks have run up in the last couple of weeks (I have no clue of the reason). Nobody knows when each of these companies will delist (if at all) and if the delisting will be successful. As is the case usually, for a concentrated portfolio, research each of these stocks thoroughly and invest in them according to your risk profile. For a diversified portfolio, you can buy small quantities of each of these stocks. They are good businesses anyway (and hence might not lose money). If a few of them delist, the portfolio will make a decent (not outsized) return.

P.S: BOC (India) had declared their intention to delist in Jan. The delisting failed. However, the stock has run up quite a lot. Any clue as to why all these stocks are running up (I mean, there is an alpha, compared to the broader market (Nifty))

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  1. #1 by Neeraj on April 12, 2011 - 9:45 AM

    Hi Kiran,
    2 additional successful delistings in the recent past have been Atlas Copco and Binani Cement..
    U can ‘blame’ Atlas Copco for the run-up in prices of all the MNC delisting candidates. Copco has been quite generous in their delisting offer and have therefore succeeded. the mkt now expects all MNCs to be generous, hence the rise in their stock prices..(i am in the process of writing a blog-post on this)..excellent write-up btw..
    Cheers!
    Neeraj

  2. #2 by Dayanand on April 12, 2011 - 1:06 PM

    Out of these…Lotte India and Atlas copco are already delisted. And also binani cement.

    It is high risk game as failure of delisting will burn your fingers like Suashish Diamond, Goodyear India where my big money is stuck…

  3. #3 by Kiran on April 12, 2011 - 10:31 PM

    @Neeraj – Thanks for visiting my blog and your appreciation. Yes, I did miss Atlas Copco and Binani Cement. My bad.

    Ahh..Atlas Copco’s premium is the reason for this alpha. Thanks for that. I was breaking my head here 🙂 I doubt if others would do the same though 🙂

    @Dayanand – Didn’t know Lotte India also delisted. Thanks for pointing that out. I have no idea of Suashish diamond, but Goodyear India is not a bad business to hold. I mean, if they dont delist, its not like you are going to lose a ton of money – they have been steady compounders, atleast in line with Nifty compounding if not more.

    Your opportunity cost though might be killing you. I understand your predicament.

  4. #4 by parimal on April 26, 2011 - 1:08 AM

    from the above ihave got more than 80% cos stock in tiny qty, i just want to ask u that suppose i do not want to sell shares at any price is it possible that they can’t take shares without shareholder’s consent, hsbc invest i have purchased on 400/- now, i do not want to sell it at par, cadbury is another example, i don’t want to sell at any cost now, but co goes into court for compulsory buyback, if co wants to wind up operations, then it is ok but co like cadbury try to force minority shareholders through court is harassing, there is a loophol in the legal system of india, if u have any advice pl share with me

  5. #5 by Sandeep Chavan on May 12, 2011 - 7:13 PM

    Compact disc is trying to delist and it only has 24.7% promoter holding. CMP is Rs.55 and delisting is promised at Rs.75. Do you think it will go through?

  6. #6 by Kiran on May 12, 2011 - 8:42 PM

    @Parimal – If they go through court, can’t do anything man. Tough luck! I understand your predicament.

    @Sandeep – I don’t trust Compact Disc or their numbers Sandeep…and hence will have nothing to do with them. I can’t give a view on the delisting – apologies.

  7. #7 by vaishali on June 23, 2011 - 10:55 AM

    hi kiran,
    i want to know about one company so plz give me reply..
    the company hiran orgochem is going so down i feel that this company will be going to close or share going to dilist it is possible…plz ans me.

    • #8 by arif on January 16, 2016 - 10:22 PM

      I’m buy Hiran orgochem stock dilist reason

  8. #9 by Dhan Raj Bansal on September 21, 2011 - 11:22 PM

    Is there any news of delisting of Fairfield Atlas in near future?

  9. #10 by rajapanda on September 24, 2011 - 12:05 AM

    Hi,
    Found your blog today while searching for something on delisting.
    One question. Is there any govt deadline on by when all companies should have minimum of 25% public shareholding ?
    Because that’s one primary reason why most of these companies have suddenly become part of in this list, right ?
    If there is a deadline, then the investors might have a reason for such alpha prices.

  10. #11 by Kiran on September 26, 2011 - 2:05 AM

    @Vaishali – No idea.
    @Dhanraj – Very unlikely. Refer this announcement on BSE. They are actually reducing shareholding from 84% to 75% (http://www.bseindia.com/stockinfo/anndet.aspx?newsid=f57616a2-d287-43ca-bb8d-b38f9b932955&param1=1)
    @rajapanda – I am not sure of any deadline as such, but by end of 2012 is what I have read/heard. Can’t confirm though.

  11. #12 by kavitha on February 29, 2012 - 11:24 PM

    Also Khoday India and Orient press, Promotor holds 90 %

  12. #13 by venu on March 18, 2012 - 1:02 PM

    Hello,
    I am new to Trading market. Last , 6 months back I had purchased INDSEC stock. But, when I check my portfollio amount is ZERO and I got a letter title : “Indian Security Limited – Delisting Offer”.

    Is My Amount GONE? Will my amount come back?

    Please anybody guide me to get my amount back….

    Thanks in advance

  13. #14 by Vishal on February 11, 2014 - 3:14 AM

    We Buy Delisted / Unlisted / Physical Shares, Kindly Contact If anyone Want to Sell It. Vishal 097260 56080

  14. #15 by ashok mehta on June 27, 2014 - 12:26 AM

    If share price is kept low by manipulation and company want to delist and don’t want to give fair value to small share holder what action minor shareholder can take

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