Sucheta Dalal :De-listing the minority shareholders
Sucheta Dalal

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De-listing the minority shareholders  

Aug 7, 2006

Last week’s trading pattern with the steep and inexplicable rise and fall of stock prices suggests large-scale market manipulation. This is happening despite the big change in the trader profile due to increased transparency, stricter Know Your Customer (KYC) rules and now, the need to quote Permanent Account Numbers (PAN).


These changes have driven unaccounted money to illegal bucket shops or dabba traders who run sophisticated cash operations around the country. However, since the Securities and Exchange Board of India (Sebi) is waiting to move to its new headquarters before launching the fancy new online surveillance and monitoring system acquired in April, it leaves the field open to domestic and foreign investors, usually supported by dubious companies to manipulate prices.


The three-year monster bull run has indeed been a bonanza for Indian companies, driven mainly by their spectacular financial performance, hefty dividend payouts and the big increase in acquisitions, mergers and strategic investments in India and abroad. Minority shareholders, by and large, have also done well through dividends, stock splits and capital appreciation or benefited from takeover activity.


But, as readers point out, the overall sense of wellbeing among investors tends to bury complaints about questionable corporate practices by a few companies and their beleaguered shareholders. One area that needs watching is the frequent listing and delisting by certain companies.


When Sebi notified its reverse-book building rules, companies and their intermediaries insisted that they were unworkable. There were incessant complaints about ‘cumbersome’ procedures and fears that minority shareholders would hold-up corporate actions by ridiculously priced bids. In fact, things are turning out to be quite the opposite.


First there was DLF Holdings Ltd which plans to re-list its shares within 3 years after it chose to delist—but at a much higher valuation and after leaving in the lurch over a 1,000 minority shareholders who clung on to their shares. Its strategy was to simply violate the takeover rules and pay up the consequent penalty of Rs five lakhs.


Flextronics Software Systems recently delisted its shares at the ‘discovered’ price of Rs 725 after reverse book building. The six-month offer period for tendering Flextronics shares ends on August 10, but even before that Kolhberg Kravis Roberts of the US acquired a stake in the company for $900 million or around Rs 1,300 a share. This is twice the value offered to minority shareholders a little earlier. Minority shareholders can indeed hang on to their shares in the unlisted company and hope it gets listed again, but they are in for an uncertain future if that does not happen. This company has been listed for less than five years.


Investor Anil Kedia wrote to me about The Kadri Mills (Cbe) Ltd, which was listed on the defunct Madras and Coimbatore bourses. The company made several attempts to delist its shares before it accepting the discovered price of Rs 80 towards the end of 2005. After delisting, 2% of the shareholders held on to their shares, but the company has now convened an Extraordinary General Meeting to extinguish only those shares held by minority shareholders by paying them Rs 80 per share.


This ruthless elimination of minority shareholders is perfectly legal, but it is bound to raise questions if the intention is only to seek re-listing after the mandatory interregnum has passed, and that is difficult to predict. After all, DLF Ltd is not the only company to re-list at a significantly higher price. Triveni Engineering got re-listed at a significantly higher price within a few years after delisting. Precot Mills of the Elgi Group was relegated to the Z Category stocks and was not traded for several years. When it got relisted on the National Stock Exchange the stock zoomed to Rs 500 and is still traded around Rs 300.


Spencer from the RPG group, which was listed on the Madras bourse, delisted at Rs 50; media reports now mention plans to re-list the shares after a corporate re-engineering effort which will involve raising public money at a premium. Why even Bharti Tele, a market favourite, had got delisted a few years ago and the current day bluechip is a group company that has suddenly turned valuable. A few months ago, we wrote about Nalwa Sons, a Jindal Group holding company, trying to dilute minority shareholding by a generous Employee stock purchase scheme to a 100 newly recruited persons connected with the group being passed off as employees.


What Kadri is doing in extinguishing minority shares sets an ugly precedent; although its action affects only a small group of regional shareholders, it amounts to a forcible eviction of minority shareholders. We are still waiting to see what the Ministry of Company Affairs (MCA) does about the violation of minority shareholder rights in DLF by simply not posting them the rights offer that initiated a massive restructuring of capital. Unless the MCA and Sebi apply their minds to this issue, companies will blithely go public during every major bull run to raise money and exit during every bear phase when the price drifts down or performance slips.


This has a dual advantage for companies—they can delist at a low price during a bad phase and also avoid the compliance burden under corporate governance regulations and the Listing Agreements of stock exchanges. When the market booms again, they can come back with a relatively clean slate, announce new expansion or diversification plans and raise fresh money at a fat premium (by hiring experts to whip up favourable market sentiment).


Such exploitation of minority shareholders will only drive them away from the capital market, especially with the new trend of IPOs quoting below the offer price even in a bull market.


-- Sucheta Dalal