How delisting offers work

While IPOs have dried up with Covid-19, delisting proposals seem to be gathering steam.

Vedanta, Hexaware Technologies, Adani Power and Prabhat Dairy are a few of the listed companies that have recently announced plans to delist.

Given that delisting is not a very frequent occurrence in the Indian market, here’s what you as a shareholder need to know.

Types of delisting

Under Indian laws, a company may seek to delist from the exchanges in three situations.

One, it may wish to continue trading on just one or two exchanges, preferring to delist from other exchanges.

Here, there’s no effect on shareholders.

Two, a stock exchange may take a decision to compulsorily delist a company if it is found to be violating listing rules, trading infrequently or is defunct. Here, the promoter is required to acquire the shares from the public within three months of the delisting, at a fair price decided by independent valuers.

Three, the promoter of a company may decide to voluntarily delist it to fully control its ownership. Here, SEBI rules require the company to give public shareholders a fair exit through the reverse-book-building route. It is this type of delisting that we’ll deal with here.

How it’s done

The first indication you’ll get of your company’s plans to delist is its intimation to the stock exchange that its board has approved the delisting proposal.

Thereafter, the company will write to you asking you to vote through postal ballot to approve delisting. Unless public shareholders vote in favour of this special resolution in the ratio of 2:1, the company cannot proceed with the delisting.

Once the vote is through, the company applies to the stock exchange for in-principle approval to delist.

Within a day of receiving approval from the exchanges, the company needs to make a public announcement of the delisting offer through a national newspaper. The offer will be launched within seven days of the announcement and remain open for five days.

The tendering of shares towards delisting is a completely electronic process. If you hold demat shares, you can participate through your stock broker to electronically enter your bids on the platform specifically opened by the exchanges. To receive the offer letter and bidding details, it is critical that your email address is updated in your demat account.

How it works

The Securities and Exchange Board of India (SEBI) prescribes reverse-book-building for promoters to buy out their public shareholding when they seek to delist.

In an IPO, the company sets a price band within which you bid for allotment. In a delisting offer, the promoter sets a floor price. The floor price is usually decided based on the average traded price of the stock in the 26 weeks before the first delisting announcement.

Once the offer opens, investors wanting to tender their shares can bid at or above the floor price.

The final offer price is ‘discovered’ as the lowest price at which the promoter is able to mop up enough shares to reach a 90 per cent equity stake.

All bids at or below the discovered price will be accepted.

Success or failure

There’s no cap on the price at which shareholders can bid in a delisting offer to part with their shares. In the past, this has led to situations where some bidders demand extraordinary premiums over the floor price.

Last year, the delisting offer of Linde India saw the discovered price at ₹2,025 per share against the floor price of ₹428.

In such cases, the promoter has the right to either accept or reject the discovered price. In the latter, the delisting gets shelved.

The delisting can also fall through if the promoter doesn’t mop up enough shares to get to the 90 per cent mark. In the past, however, companies, particularly MNCs that have had their delisting offers thwarted, have had a second shot at it a couple of years later.

Investors can tender their shares to the promoter at any time within a year after the book-building, which the promoter must accept at the discovered price.

Making the most

To get the maximum bang for the buck from a delisting offer, there are three factors for investors to keep in mind.

One, tendering your shares in a delisting transaction is an irreversible decision. The current market price of the share or even the floor price may not be accurate indicators of the company’s future potential.

Try and gauge the fair value based on metrics such as price-to-book value and 10-year average PE before bidding.

Bidding too low is the biggest risk because the promoter can buy you out at a discount to the discovered price.

Two, watch out for advice from proxy advisory firms on whether you should take up the offer. Three, if you are unsure of what to bid in the offer, wait until the last day for news about the price at which institutions have bid. Else, even after the offer, you can tender your shares within one year.

Overall, if you own shares in a good business, do not rush to exit when delisting offers come up in depressed markets.

Given that there may be repeated attempts, biding your time can lead to better payoffs.