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Why do MNCs want to delist from India? - Views on News from Equitymaster
 
 
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  • 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.

    Mode Buy Back Delisting
    Acquirer Company itself Promoter / Promoter group
    Effect of capital base Reduction of capital No change in capital

    Major reasons for delisting:

    • 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.
    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.

     

     

    Equitymaster requests your view! Post a comment on "Why do MNCs want to delist from India?". Click here!

    9 Responses to "Why do MNCs want to delist from India?"

    Vishal

    Mar 2, 2013

    DEAR READERS,
    WE ARE BUYING ANY DELISTED / SUSPENDED COMPANY'S EQUITY SHARES AS WELL AS RAYBAN SUN OPTICS, TO KNOW THE PROCESS, IF WISH TO SELL, KINDLY CONTACT. VISHAL 097260 56080

    Like 

    RAJKUMAR JAIN

    Oct 11, 2012

    DEAR ALL WHO HOLD DELISTED SHARES NEED NOT TO WORRY .WE ARE
    BUYING ALL TYPE OF DELISTED SHARES DEMATE-PHYSICAL
    PLEASE CALL TO GET FAIR VALUE
    REGARDS
    RAJKUMAR JAIN
    09829138563

    Like 

    AMARISH SHAH

    May 25, 2012

    do tHREE things for mnc
    1. DO NOT GIVE BUY BACK THE SHARES TO THEM
    2. STOP TO PURCHASE MNC PRODUCTS
    3.BUY SWADESHI PRODUCTS, LIKE- DABUR,GODREJ,RAMDEVBABA

    EVERY INDIAN SHOULD DO THIS
    AMARISH

    Like 

    Pabitra

    Feb 29, 2012

    These are MNCs which have always exploited developing nations. When they manipulate the balance sheets, the transparency of stock exchanges expose them. Then they try to get themselves listed.
    If a shareholder refuses to part with shares, he is harassed to a great extent. Some techniques used to deprive him of shares have been enumerated by Gopinath giving examples of Philips and Digital. Many more are there such as Cadbury, Kodak etc.
    What is not mentioned is the harassment in delaying the dividend and not sending Annual report. Such examples are Xerox, Carrier, Eserve, Otis, Organon etc.
    Neither Indian laws written to handle these nor the machinery ( like MCA, Company Law board, SEBI and Courts etc.) capable of delivering justice at right time and right cost.

    Like (1)

    Ramanand

    Jul 28, 2011

    There is also the simple matter of starting to generate losses. Suddenly a good company in a good business starts to generate losses even when other companies in the same business are doing exceedingly well. As prices fall due to bad fundamentals, even long term shareholders begin to start selling.
    Then at a fairly low price the parent comes out with a good offer and delists. Subsequently, definitely the company becomes profitable again, but that's no longer known since its now no longer disclosed.

    Like (1)

    Gopinath

    Jul 16, 2011

    You are lucky my friend that you are still holding on to Rayban. There are more companies which then indulge in a unique scheme called Capital Reduction wherein ur shares will be cancelled at a pre approved price. Once the Foreign Promoter acquires 90+% and still the residual shareholders are unrelenting, there are mamy ways which co. employes to throw them out

    Capital Reduction:

    One fine morning company decides to reduces its capital by twice the shares held by non promoters. The company cancels all o/s shares of non-promoters and a similar qty of shares of promoters. After cancellation the promoter now holds 100%. Needless to say price fixed way below the instrinsic valuation. Eg; John Fowler India.

    Buyback:

    This is one more way to taking the money out of India. There is no dividend for the next few years. The company starts a buyback. Unlike the earlier buyback here the promoter can also participate. The unrelenting shareholder dont give their shares and the promoter gives in to the company and the cash from Co. goes to the foreign promoter. Eg: Philips.

    Scheme of Amalgamation and conversion of Equity Shares to Redeemable Pref shares:

    Eicher Ltd adopted this novel method. A scheme of arrangement is announced and co is merged. However in new co instead of equity shares, Pref shares are issued which are redeemable.

    Increase in face value:

    This is by far the simple method which doesnt need any court sanction and is an efficient way of throwing shareholder. The face value of share goes up from Rs 10 to Rs 25000 and if are holding some 1000 shares it becomes a fraction share and you are paid off. This was used by Digital Equipment to throw out the remaining shareholders.

    The co law is outdated on all these issues and needs to be changed.

    Like (1)

    ap

    Apr 23, 2011

    MNC ONLY INTERESTED IN TAKING PROFITS BACK HOME .ONCE DELISTED NO QUESTIONS AT AGM.PROFITS EARNED IN INDIA NEEDS TO BE SHARED WITH INDIAN PUBLIC.INDIRA GANDHI MADE COMPULSORY DILUTION IN MNC.THE PRESENT POLICY BRINGS IN EAST INDIA COMPANIES THROUGH THE BACKDOOR.BAN DELISTING.

    Like (1)

    RAY of hope BAN

    Apr 15, 2011

    This is indeed a very informative article & really the need of the hour.

    I hold few hundred shares of Rayban Sun Optics India Ltd. The company got delisted from all the stock exchanges in Inida before few years. The promoters Luxottica group of Italy now holds more than 93 % equity of this company. Recently, through their annual report, they announce an offer at the rate of 137 per share to acquire the remaining 6.68 percent shares lying with non promoter shareholders. This offer is yet to be approved by the shareholders & Hon. High Court. I am basically a very long term investor. I have been holding shares of Rayban Sun Optics India Ltd. since last 10 years. Five year down the line I see a very great future of this company in India looking at their world class brand portfolio & rising income & spending level of Indian youth for luxury lifestyle products. When the time became ripe for real wealth creation & taking the maximum benifit, the company came up with an buyback offer at a nominal price which is even Rs.43 lesser than the last buyback offer which was made at Rs. 180 per share before few years !

    I have now 4 questions :

    1..

    If this offer is approved by all the required entities, do I have a compulsion to surrender my shares ?

    2..

    Can I still hold my shares even if the rest of all the shareholders surrender their shares & exit completely ?

    3..

    Can I get all the corporate benifits like dividend, bonus, annual report, etc. even if I am the only non promoter shareholder left in this company ?

    4..

    Is there any exit option post the successful completion of this offer in future after 3 to 5 years ? How the 'Fair Value' of company's share can be determined at that time ?

    I will really appreciate if some expert comes forward & addresses to these queries which is in the interest of all the minority shareholders left in the MNC delisting offers.

    Thank you very much.

    Like (6)

    Raju

    Apr 13, 2011

    Thanks for the info. Want to know more on the effects of delisting to retail investors of the company. especially looking for how an investor can get the value of his shares back after company is delisted? Will he continue receive the dividends from the company etc., thanks once again and look forward to your next articles on the subject.

    Like (2)
      
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