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Monday, Apr 22, 2002

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Disturbing delistings

Virendra Verma

MUMBAI, April 21

OVER the past couple of years there has been a trend of multinational companies buying shares of their Indian subsidiaries from the domestic market. A number of major names such as Philips, Reckitt Benckiser and Nestle have made open offers to acquire the floating stock of their local subsidiaries.

The trend is disturbing to investors and market participants because most of the offers have been made with the intention of delisting the company from Indian bourses. The strategy is bothering not only market players but also the capital markets regulator, Securities and Exchange Board of India (SEBI). Mr G.N. Bajpai, Chairman, SEBI, recently went on record stating that the trend is disturbing and needs to be examined.

Market players say that these companies are delisting to avoid statutory disclosure and also because of low stock valuations. Ironically, disclosure norms are perceived to be much tighter in the countries of origin of the parent MNCs when compared with India. None of the companies that have made open offers to delist from Indian bourses has, however, indicated any reason for the decision.

Existing guidelines do not restrict a company getting delisted. It is just that the price at which some of the companies have made open offers has raised a few eyebrows. Whether investors are getting the exit option at the right price is a moot point. The onus lies with the regulator to analyse the issue and lay down pricing rules if a company wishes to delisting.

At present, pricing of open offers is governed by SEBI's Takeover Rules. There are four parameters for pricing

a) Negotiated price under the agreement, which triggered the open offer.

b) Highest price paid by the acquirer or persons acting in concert for any acquisitions, including by way of allotment in public or rights issues during the 26-week period prior to the public announcement.

c) Price paid by the acquirer under a preferential allotment made to him or to persons acting in concert at any time during the 12-month period up to date of closure of offer.

d) Average of weekly high and low of the closing prices of shares as quoted on the stock exchanges, where the shares of the target company are most frequently traded during 26 weeks prior to date of the public announcement.

The last-mentioned method is the most popular among MNCs making open offers to delist subsidiaries. The current practice is to offer a premium (decided by the offerer) on the prevailing market price. Many investors and analysts say that some open offers should have been at a higher premium.

It is up to SEBI to keep in mind this trend when it finalises the new takeover guidelines. Last week, Mr Justice P.N. Bhagwati, Chairman of the Takeover Committee, had stated that the new guidelines would be finalised shortly. When the committee began review the existing guidelines, the trend of delisting companies through the open offer route had not picked up.

The regulator could perhaps look at various financial parameters such as future cash flows, value of brands and replacement value of plants or business while suggesting a pricing formula for open offers with the intention of delisting.

Proactive steps by the regulator are the only way to stop good stocks from disappearing from the Indian market. Though it may not be possible to restrain MNCs from delisting from the stock exchanges if they so wish, SEBI can ensure that investors who have been holding stocks for many years get the real worth of their investment.

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