Vedanta's Failed Delisting Bares Systemic Gaps

Vedanta Ltd.'s delisting went from almost-a-success to a failure on account of a large quantity of unconfirmed orders.At 3.30 p.m. on Oct. 9, when the reverse book building process was originally meant to close, 137.78 crore shares had been tendered by public shareholders, more than the 134.12 crore needed for the promoter to cross the requisite 90% shareholding threshold.Except, of these bids only 125.47 crore worth of shares were confirmed at the time. And the number didn’t change despite a four-hour extension granted by the regulator due to technical glitches earlier in the day..That means, the final book included 12.3 crore shares in unconfirmed or invalid bids. At least two people acquainted with the delisting process said this is an unusually high number of unconfirmed shares.They haven’t seen unconfirmed shares in any book-building issue like here, said a person working in the custodian department at a foreign bank on the condition of anonymity. The quantum is too high and may be picked up by the surveillance department of the market regulator, he said.It is unusual to see such a high quantum of unconfirmed shares, said a senior stock exchange official, also on the condition of anonymity.Punching errors at the broker end are common, said another banker who didn’t want to be identified. In this case, it was a 15-odd orders out of thousands (74,420); it’s just that each order was high in quantum of shares bid, he said.The usual proportion of unconfirmed bids is less than 1-2% in volumes, said both the person working at the custodian and the exchange official, and that too only when there is any connectivity issue. In this case, if it were a connectivity or a technical issue that had resulted in lack of confirmations, the securities regulator would have surely stepped in, they said.What Explains Unconfirmed Bids?Unlike in an IPO where a custodian submits an institutional bid in the book-building process, in reverse-book building it's the broker for institutions that requires confirmation from the custodian. The possible reason for this is that custodians may not have access to the secondary trading platform to enter bids, said a second exchange official on the condition of anonymity. There is nothing stopping SEBI to change this process, he said.All bids or shares tendered by qualified institutional buyers or QIBs and non-institutional shareholders like non-bank lenders and alternative investment funds in a delisting offer must be confirmed by a custodian.The shareholder or client asks the broker to punch in the number of shares to be tendered and at what price.This data is fed into the exchange platform.The bid/shares are transferred to the seller member’s pool account.They are then submitted to the early pay-in mechanism of the clearing corporation.Till this point, the process seemed to be running smooth. BloombergQuint’s interactions with various market participants did not throw up any issue with the early pay-in mechanism of clearing corporations. For institutions:The bid then requires corroboration from the custodian.Custodian approval comes after the client instructs it to proceed with the trade.Our checks indicated that no systemic or technology issue was reported on Friday that could have prevented or stalled such corroboration by custodians.Then what went wrong?What seems to have gone wrong here is that the clients punched in the shares and either didn’t give instructions to the custodian to approve the bids or didn’t have the shares in their account; or the bids didn’t match with the instructions, said a banker with a foreign investment bank on the condition of anonymity.Fat-finger errors for bids worth 12.3 crore institutional shares would be very unusual as brokers are far more careful with institutional clients than retail investors. The other reason in play are likely missing shares or lack of client approval.Now, why would an institution enter bids without transferring the shares to an escrow account, the banker said. There could be more to it in this (Vedanta) case, he said.While there’s much conjecture in the market right now on the reasons for failure, a clear picture will emerge only if the exchanges, custodians and regulator SEBI investigate the matter. There is no indication of that yet.A Blind ProcessVedanta’s delisting also highlighted the need for correction in how the reverse-book-building process is displayed by stock exchanges. The building of the book is visible to all via a webpage. And while bids are labelled confirmed and unconfirmed, it’s confusing to interpret the unconfirmed bids data. Some shareholders, tracking the book to decide if they want to participate or not and at what price, may assume confirmation will happen in due course.Investors should only look at the confirmed bids, and unconfirmed bids should not be showed to the public during the process, said the second banker. Custodians have three hours after close of trade to confirm these bids, and the exchange should display the final order book only after that, the banker said.The stock exchange will need to review the process and show only confirmed bids.What made matters worse in the Vedanta case was that on Oct. 9, the last day of the book-building process, technical glitches in the exchange webpage meant in several instances the book data did not show or was not updated. What the exchange is saying is that investors should go blind and put in the bids without knowing how the order book is shaping up, said the banker.Some brokers stopped accepting retail applications at 11.30 a.m. on account of back-office load on the last day of the issue. The bankers to the offer had sought a full-day extension to recoup from this, but SEBI granted a four-hour one after the market hours.To be clear, the exchange does not reveal, to the public or the offerors, details of unconfirmed bids/shares. That labelling is available only for confirmed bids.. The confirmed bids data shows that only 74.3% of institutional shares were offered for delisting, the most under-bid of which were foreign portfolio investors followed by mutual funds.It also shows that the maximum number of shares were bid at Rs 320 apiece. A price that the Anil-Agarwal metals group may have found too rich. After all, the money it had raised to fund the offer suggested a funding capability of Rs 31,401 crore--or Rs 185 per share.

Vedanta's Failed Delisting Bares Systemic Gaps

Why Vedanta's delisting may have failed...

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