Apr 13, 2011|
Why do MNCs want to delist from India?
In the last decade, we have seen numerous cases where listed subsidiaries of multinational companies (MNCs) got delisted from Indian stock markets. Companies such as Reckitt Benckiser, Cadbury, Philips, Panasonic, Ray Ban, Otis and Carrier were once listed on the Indian bourses. Some of these companies were dream businesses in which investors would have happily parked their funds and slept well in the night. In this article, we will highlight the possible reasons behind delisting of MNCs from Indian bourses.
What is Delisting?
Delisting means a permanent removal of shares of a listed company from being publicly traded on a stock exchange.
Is delisting different from buyback of shares? People sometimes confuse delisting with buyback of shares but the two are quite different. In a buyback program, the shares are bought back by the company itself and the shares bought back are extinguished. This leads to a reduction of capital for the company. Whereas, in delisting of a company, the shares are acquired by the promoter of the company. Delisting does not reduce the capital for the company.
||Promoter / Promoter group
|Effect of capital base
||Reduction of capital
||No change in capital
Major reasons for delisting:
So we have seen that there is no single reason why MNCs opt to delist their stocks. Now you may ask: Is delisting by MNCs good or bad for investors? Well, that depends on the price at which the delisting happens. However, if we take a long term view, minority investors definitely stand to lose out on the possible gains that can be made from a few MNCs that are global brands and have amazing businesses. In the next couple of articles, we will discuss the changes in the delisting rules and analyse some specific delisting cases.
- Lenient FDI norms and removal of sector caps
In the first place it is important to understand the reason behind MNCs getting listed in the Indian stock markets. Two decades back, foreign companies eager to set up their shops in India had restrictions to operate alone. They had to adhere to the foreign direct investment (FDI) policy that had an upper cap on the maximum ownership by a foreign entity. They could not have owned 100% of the business entity in India. This requirement led many foreign companies to list their subsidiary in India.
But the last few years have seen the Indian economy changing its FDI policy in many sectors. There are now no caps on ownership except in a few critical sectors. MNCs can own full 100% in their subsidiaries if they want to. So the compulsion of FDI policy that made the MNCs list in the markets is no more applicable. This has been one of the biggest reasons for the MNCs to delist now.
- Strategic move for greater independence and lower costs
For a company to stay listed, the company has to adhere to a lot of rules and regulations. There are various forms of compliance to be met with BSE, NSE, SEBI and other regulatory bodies. Timely information is to be disclosed to the shareholders (e.g.: annual report, quarterly results, etc). Approvals are mandatory for taking significant investment decisions like M&A, raising funds among others. All these aspects not just increase the time but also increase the cost of operations. So if the MNCs have enough financing support from their parent company and do not require financing from the Indian capital market, it makes sense for them to delist.
- Depressed market conditions
Whenever we see the stock markets falling due to various reasons, almost all the stocks get beaten down. These suppressed stock market conditions lead to pessimism among investors who just want to get out of equities. Most investors do not differentiate between the good and the bad in that kind of pessimistic environment. Promoters of MNCs use this kind of undervaluation to their advantage. They acquire the remaining shares at lower valuations and apply for delisting.
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