Sucheta Dalal :The delisting conundrum and the need to solve it
Sucheta Dalal

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The delisting conundrum and the need to solve it  

Feb 20, 2006

It is a move that the Bombay Stock Exchange (BSE) will certainly welcome. It has over 7,200 companies, of which only 2,500 are actively traded, while 4,750 are a nightmare to police. Many of these are brazenly manipulated in a bull market and are completely dormant in a bear market, often refusing to pay even their listing fees. Delisting companies is the norm in leading international bourses such as Nasdaq, the New York Stock Exchange (NYSE) and the Tokyo exchange, who take pride in their tough norms that allow only the best companies to be listed. Delisted companies go on to trade on OTC bulletin boards or pink sheets, which have low supervision and no direct contact with listed entities. Companies in these countries feel humiliated if they are delisted for failure to meet continued listing criteria.


It is the opposite in India. A misguided attempt to encourage retail equity investment through low entry barriers and insistence on a 40-city geographical distribution of Initial Public Offerings (IPOs) has, in fact, disempowered investors over the past decades. The BSE’s 4,500-plus thinly traded scrips are a legacy of this policy.


Until a decade ago, stock exchanges ruthlessly delisted companies that failed to meet disclosure rules or pay listing fee. Sebi barred this practice because retail investors suffered the most due to such delisting. These days, there are plenty of examples, such as some steel companies, which traded below Re 1 but have recovered dramatically; or penny stocks that provided exit opportunities to long-term investors because someone ramped them up. The flip side of the latter opportunity is that a new set of investors are duped by the manipulators.


From the regulator’s perspective, this is a problem. The revival of steel companies aside, the legacy of untraded stocks is usually bad news. They are available for back-door listing through reverse mergers that side-step Sebi’s entry norms and initial scrutiny and are difficult to monitor and supervise. Since investors chafe at delisting, the regulator is considering the idea of asking companies to offer a fair exit value to investors (to be decided by a valuation committee) before compulsory delisting.


• BSE has over 7,200 listed cos, but only 2,500 are actively traded

• Until a decade ago, bourses would delist cos for not meeting disclosure norms

• Sebi stopped this, as retail investors would suffer due to the delisting


There is a lot of confusion about this concept and who it will apply to. On the one hand, several multinational companies have been seeking to delist their shares, because they dislike the restrictions and disclosure norms imposed on publicly traded entities. They also have no foreseeable need for public funds and see no point in putting up with the pressure of quarterly results, analysts’ meetings and constant rating of their performance on the bourses.


When a rash of profitable MNCs sought to delist their shares, panicky investors forced the regulator to step in. There were complaints that the exit price offered by them wasn’t good enough. Consequently, Sebi instituted a reverse-book building mechanism that allowed transparent price discovery by exiting shareholders though the automated stock exchange process.


Corporate India dislikes reverse book-building. Companies who used multiple open-offers to buy out retail investors are also irritated at the few who hang on to their shares even after the stock is delisted. They want Sebi’s exit price mechanism to help get rid of retail investors whenever a company chooses to go private. But these are a different kettle of fish from dormant companies that are thinly traded, be-cause there is negligible corporate growth and, hence, no investor interest, except during a bull market. It is these that the BSE wants to compulsorily delist; but they don’t want to go and are unlikely to offer investors any exit price—fair or otherwise—and the regulator cannot make them pay.


Ultimately, Sebi may have to devise a mechanism such as the bulletin boards to transfer dormant and infrequently traded companies. These would only offer quotes and operate almost like unregulated markets (someone likened the US bulletin boards to unsupervised flea markets). Investors will trade at their own risk, but they would get some liquidity and an exit price when they want to sell. Are we prepared for such a situation?


Else, can we come up with a better answer that does not hurt small investors and not burden the stock exchanges?


-- Sucheta Dalal