Sucheta Dalal :Market regulator must meet investorsR17; interests before changing delisting norms
Sucheta Dalal

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Market regulator must meet investors’ interests before changing delisting norms  

Mar 19, 2007

On last Friday, the reverse delisting exercise of Essar Shipping came to a close after a week long extension from March 9 to March 16. This is probably among the last few companies to delist before the Securities and Exchange Board of India (Sebi) examines its plan to change the delisting rules.

Sebi has proposed a change in the reverse-book building rules to make them more company-friendly and eliminate the role of retail investors in the price-discovery process. We are told that Sebi’s amendments are based on corporate complaints that reverse book-building is cumbersome and can be manipulated by a few retail investors. Is that true? Let us look at the recently closed Essar Shipping issue to see what really happens.

The Essar group has announced plans to delist all its companies from Indian bourses and started the process with Essar Shipping. In the 1980s and again during the primary market mania of the early 1990s, the group quickly raised large sums of public money in multiple companies. The funds were often diverted to incubate new projects; some of these were started in the listed companies and then spun off, others were set up as unlisted entities. The group ended up in a financial mess and even defaulted on its international repayment commitments. The listed companies remained in the doldrums until fairly recently and repeatedly restructured its debt and repayments; however, the promoters’ private investments seem to have thrived.

Notice the daily reports in the media about their estimated wealth, in the run up to the acquisition of Hutch shares by Vodafone or their international business plans. Every Essar company, whether it is Essar Oil, Essar Steel or Essar Shipping has caused anguish to shareholders as the shares traded at a fraction of their face value of Rs 10. Essar Steel shares were even issued at a high of Rs 200. Investors later lost half the face-value in capital restructuring. Just when investors were hoping to earn some returns, the group dropped a bombshell and announced plans to exit from the bourses and list their shares overseas.

Companies have the right to delist their shares even if it upsets minority investors; but they have to offer a fair exit premium to retail ‘co-owners’ who are no longer wanted. It is the games companies play to minimize the exit price that invariably causes anger and protests. Reverse-delisting conducted by the bourses on an electronic platform provides transparent price-discovery by letting investors quote their own exit price, in relation to a fixed floor price offered by the company. The price, at which the maximum bids are placed, emerges as the ‘discovered’ exit price. If the company rejects that price, then the delisting attempt fails. If accepted, investors get six months to tender their shares.

In most cases, the bidding process is rarely initiated until the promoter group controls over 80 per cent of the outstanding shares. In Essar’s case, a large brokerage firm has been approaching investors for the last few months and cajoling them to sell. Since most companies follow this practice, the reverse-delisting process is really aimed at 10-15 per cent of the minority investors.

The BSE website shows Essar Shipping’s promoter holding at 76.46 per cent while ‘others’ hold 23.54 per cent. How onerous can an electronic bidding process be when less than a quarter of the shareholders are involved? Notice how companies have no problem with the far more onerous book-building process for raising funds, which requires copious disclosures, expenditure and publicity to ensure that it reaches out to the entire universe of potential shareholders.

In Essar Shipping’s case, the retail portion of 23.5 per cent included large funds who reportedly tendered their shares at a curiously low price of under Rs 50 although the market price on the closing day was a shade higher and when the book value of Essar Shipping is estimated at Rs 60. Essar Shipping which lists the promoters’ address at Limassol, Cyprus began with a low reserve price of Rs 32, which is below the price at which the share has been trading in the past few months. Remember, the shares quoted at a 30-35 per cent discount to face value until early 2003.

The delisting offer which closed on Friday, March 16, shows a large block of bidders at around Rs 73, another block at Rs 60 and a third big block at a shade below Rs 50. Investors hope that the company may be morally obliged to accept a price of around Rs 60 in order to appear fair to its retail investors. That remains to be seen.

Meanwhile many shareholders are planning to take their chances and hang on to their shares until the global listing. They assume that the company would be more conscious about its international image and after the unprecedented victory by DLF’s minority shareholders, they are more confident that they cannot be easily discarded or sidelined. The next couple of weeks will decide two issues — first, whether the Essar Group gives a fair deal to its retail investors; and second, whether the Sebi board understands that involving retail investors in price discovery can be the only way of ensuring a fair and transparent delisting process, which is neither expensive nor cumbersome. After all Sebi must remember that the preamble to its statute requires it to put investor interest before every other consideration.

-- Sucheta Dalal