Sucheta Dalal :Easy delisting
Sucheta Dalal

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Easy delisting  

May 23, 2005

There are approximately 9,000 companies listed on India’s 23 stock exchanges, of which barely 2,500 are actively traded, even after the new enthusiasm for mid-cap and penny stocks. Last week, capital market regulator M. Damodaran said he would make it easier for companies to delist their shares in six months. This is rather paradoxical. The smallest of companies want to pick investors’ pockets through public issues; but after listing, they complain about high compliance costs and want to exit. Delisting norms have been tightened precisely because companies used tricks such as not paying listing fees to get delisted. This allowed them to ditch investors and let stock exchanges take the blame. Many such companies used to routinely pay up listing fee arrears and get re-listed in every bull run. Securities and Exchanges Board of India’s (SEBI) sympathy for such companies is unclear, as is its proposal to scrap the reverse book-building mechanism for delisting, which has worked quite well (Sterlite is an example). It is industry’s view that the mechanism is ‘‘costly and difficult’’. If SEBI wants to clear small IPOs, it must address investor concerns before listening to corporate demands. After all, small companies have the maximum complaints about compliance costs. The regulator would do well to close down defunct bourses and introduce a vibrant market for small and medium enterprises before pushing for ‘easier’ delisting norms on the larger bourses.

Low-charge myth

At January-end, SEBI brought cheer to investors by abolishing account opening and custody charges for depository accounts. Three months later, the excitement has vanished. Since SEBI did nothing to rationalise or standardise fees, Depository Participants (DPs) hiked other charges to compensate for lost income. It was assumed that companies, who are the biggest beneficiaries of dematerialisation, would be made to pay a part of the custody costs. That has not happened either, forcing Investor Associations to protest the unconscionable hike in DP charges. The Tamil Nadu Investors Association says the Stock Holding Corporation is demanding deposits to compensate lower custody charges. P.D. Kasbekar, a retired civil servant, reduced his total shareholding of 1,800 shares in 11 companies (in the year 2000) to 1,000 shares in four companies to cut high account maintenance charges, which have progressively increased from Rs 100 p.a. when he opened his account, to a steep Rs 500 recently. His DP (HDFC Bank) also demanded an advance of Rs 2,500, to be adjusted against future dues. Unless SEBI acts quickly, these costs will continue to drive investors out of the market.

SEBI’s response

At the end of March, SEBI promised to investigate the hike in demat account charges. Since then, it has found that major DPs have indeed hiked their Account Maintenance Charges (AMC). Bank of Baroda’s charge has gone from zero to Rs 264 p.a., Corporation bank from Rs 200 to 250, UTI Bank’s rose steeply from Rs 400 to Rs 600, HDFC Bank from Rs 299 to Rs 500, IDBI Bank’s from Rs 400 to Rs 500. Among the large DPs, only ICICI Bank seems to have maintained the charges at Rs 350. SEBI needs to act before more investors exit the market to avoid erosion in the value of their holdings. Investor Associations have also been pleading with the regulator to find a way to cut demat charges on dud and untraded stocks. Their situation is worse in case of shares where trading has been suspended due to non-payment of listing fees or due to regulatory action. Investors are left holding on to shares in depository accounts even when companies have been delisted. Mandatory dematerialisation has left investors between the devil and the deep sea. Avoiding Account Maintenance charges by re-materialising the shares is a costly business, while holding on to them means payment of hefty costs for worthless shares. Many investors want to hold on to their shares in the hope that a turnaround or takeover would provide them an exit route. SEBI Chairman M. Damodaran is aware that the high entry barrier to stock market investment has eroded India’s investor base. The share of household savings in the financial sector has already plummeted from 10 per cent in the 1990s to 1.4 per cent in 2003-04. Some swift corrective action is required to reverse this trend.

MAPIN’s fate

One of the first actions of M. Damodaran as SEBI chief was to extend the time for individual investors to register themselves under the MAPIN database, which involved the creation of unique identification through biometric finger printing. He also set up a committee to discuss complaints about MAPIN. We now learn that the committee is split down the middle, over the creation of the database with many members insisting that biometric fingerprinting should be scrapped in favour of some other form of unique identification. Some members have also argued in favour of using existing identification such as PAN numbers for market-related transactions. Although the issues will finally be decided by SEBI, we learn that MAPIN’s creators, naturally enough, are strongly in favour of not tinkering with the system they have created.

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-- Sucheta Dalal