A share may be delisted from a stock exchange voluntarily or compulsorily. A compulsory delisting is the result of a breach which could entail not meeting the necessary disclosure requirements. Voluntary delistings on the other hand are driven by economic and financial considerations such as costs of keeping the stock listed, the cost of complying with disclosure rules, or simply that the benefits of being listed have not accrued to the company.
Over the years there have been delistings in India for each of the these reasons. Taking the dataset for delisting reported by NSE between 2002 and 2020 it is observed that delistings—compulsory and on liquidation—increased manifold in 2016. This may be correlated with the Insolvency and Bankruptcy Code and the clampdown on shell companies, whereas voluntary delistings include those exclusively from NSE.
The Reasons
So one may ask why companies voluntarily delist.
Various reasons have been ascribed internationally. In the United States, companies registered with the Securities and Exchange Commission often choose to delist to go dark, so as to avoid regulatory compliance. Marosi and Massoud (2007) find that firms with fewer valuable growth opportunities, higher leverage, and lower market momentum tend to go dark. Pour and Lasfer (2015) find that companies delisting from the London Stock Exchange’s Alternative Investment Market do so since they were unable to raise funding so their inside ownership and leverage remained high. There may be other causes such as the cost of staying public are no longer outweighed by the benefit (Bharath and Dittmar, 2010). Then there are strategic concerns to be able to extract private benefits (Kim and Lyn, 1991). Although the answers are to be examined on a case to case basis, it is possible to evaluate if each of these has influenced the decision to delist in India.
First, the annual listing cost in India starts at Rs 2.5 lakh on the BSE and Rs 2.9 lakh on the NSE for companies with paid-up capital of up to Rs 100 crore. This goes up incrementally with the share capital. For example, a company with share capital between Rs 400 crore and Rs 500 crore has to pay annual fees of Rs 6 lakh and Rs 7.3 lakh to BSE and NSE respectively. It is possible that some of the companies whose shares do not trade substantial volumes may prefer to delist and may also do so from NSE, although it is the platform where a bulk of the transactions take place, given the costs are higher. Therefore, the costs would be a reason for illiquid companies.
Then there are reasons such an inability to take advantage of the stock market. To understand if this factor is at play, I estimate the debt to equity, profitability ratio, and dividend payout ratio of 72 companies that delisted from NSE between 2002 and 2019. I find that, on average, companies were either making higher losses or reporting lower profits before their delisting and report better financials after delisting.
Preliminary evidence suggests that companies report much higher leverage after being delisted.
Another important consideration for a listed company is dividend payout. Shareholders may a company based on the dividend declared, given that most of these companies display poor profitability and high leverage, dividends may be a costly use of their cash. I find that companies that were paying dividends prior to delisting cut these by more than half after delisting, thus using reserves for financial purposes. The same result holds if a smaller set of companies reporting information throughout the period of the analysis is taken.
Therefore, it can be said that there is evidence that companies delist for reasons such as leverage that, in fact, increases further after delisting and for the need to plough back profits.
That said, there are concerns that promoters may wish to profit by delisting, particularly during a bad phase in the market.
Also Read: Promoter Opportunism Vs Minority Protection
The Law
SEBI (Delisting of Equity Shares) Regulations, 2009, mandate that a company seeking to delist its shares from one or more recognised stock exchange having nationwide terminals, is required to provide an exit opportunity to all its public shareholders. In addition to the approval by the board of directors, a special resolution must be passed after at least twice as many public shareholders agree to the delisting as those that disagree, based on the explanatory statement provided to the shareholders, and a floor price must be fixed at which the shares will be acquired. For frequently-traded shares, this price is fixed at either the average of the weekly high and low of the closing prices during the past 26 weeks or two weeks prior to notifying the recognised stock exchange of the aforementioned resolution, whichever is higher.
The process of reverse book building is initiated and public shareholders may submit their bids along with shares. The final offer price of shares is the price at which the maximum number of shares are tendered by public shareholders. The promoters have the choice to accept such final price or to decline the offer and must then follow due process indicating failure of delisting. However, if the promoters accept the final offer price they must accept all shares tendered at the bid price, i.e. final offer price or a bid lower. However, the promoter may also fix a higher final price and make a counter-offer. For the delisting to go through it is necessary the shareholding of the promoters should be 90% of the share capital or the aggregate of pre-offer promoter shareholding plus fifty percent of the offer size, whichever is higher.
A shareholder, therefore, has three opportunities during the process to voice his or her concerns.
Shareholders wary of any opportunistic behaviour by the promoter may vote against the resolution, bid a higher price, or may not renounce their shares in response to such ab offer. In each of these cases, shareholders must act in consonance.
Also Read: The Probity Of Delisting In A Downturn
It is observed in the past that minority shareholders have collectively exercised each of these options thus materially affecting the delisting process. For example, in 2019 Linde India sought to delist its shares. The minority shareholders bid a price nearly twice over the quoted price. Although the promoters are permitted to make a counteroffer, the delisting was called off by the acquirer. Another interesting case is that of Essar Ports, earlier merged with Essar Shipping, that sought to delist on the grounds that the promoters were looking to consolidate. However, it failed to delist due to the lack of shareholders’ response. Interestingly, proxy advisors recommended to shareholders that they do not tender their shares since a growth in revenue was expected. It is possible that such pressure may have resulted in a significant difference between the floor price of Rs 93.66 versus a final offer price of Rs 133. Here, shareholders have exercised the options available to stall delisting.
Announcements made in the month of May by Vedanta and Adani Power livened the debate on whether delisting the stock at a time of distress in asset markets can extend an undue advantage to the promoters. Over the last decade, the two companies have demonstrated volatility in their debt to equity ratio. While they have deleveraged significantly between 2017 and 2019, they also have, on average, reported net losses during the past five years. Further, Vedanta witnessed a significant increase in the dividend payout while Adani power declared no dividend. Thus, the reasons for delisting are in part explained by the financials. In late March, the stock prices of the two companies were at the lowest since 2016. In early June, Hexaware Technologies announced a voluntary delisting proposal as well, that its board will consider.
Given the regulation, it is expected that the floor price for a delisting may be fixed at a price prevailing during the past 26 weeks, which may be higher than the current price. Experience bears out that if shareholders object to the timing of the delisting and price, they have recourse.
Suranjali Tandon is Assistant Professor at the National Institute of Public Finance and Policy.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.
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