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Delisting is now more equitable than before

Apr 16, 2011

Did you know that Reckitt Benckiser, the company that owns well known brands like Dettol, Disprin and Harpic, was delisted from the Indian stock exchanges at just Rs 250? Did you know that the chocolate maker, Cadbury India and elevator company, OTIS India were also delisted similarly at lower valuations? To the disappointment of minority investors, there were many such MNCs that got delisted. In the previous article we discussed the reason for the same. Mostly in all the cases, the minority shareholders were disappointed with the price paid to them. But post 2009, there was a change in the SEBI delisting regulation which was more equitable for minority shareholders.

We will discuss the changes in delisting regulation that took place and how it affected investors. But before that, we will stress a little more on why these delisted companies could have been great investment opportunities. Companies such as Reckitt Benckiser, Cadbury and OTIS are the market leaders in their segments. They have globally recognized brands that have shown continuous growth in sales and profits for long periods. Each such company that got delisted was a lost opportunity to participate in the future growth of the company and thereby milk profits for a lifetime. Adding to that, these companies did not even pay the right price to the minority shareholders while getting the shares delisted.

The first delisting regulation was formalized in 2003 and was later amended in 2009. Before 2003, promoters having more than 60% in the company were allowed to go for delisting. The method to arrive at the delisting price was not transparent. Investors were given a ‘take-it or leave-it’ price option by the companies. This gave an opportunity to companies to get delisted easily without paying the right price.

After the introduction of delisting rules in 2003 and the subsequent amendment in 2009, the concept of reverse book building process was introduced. Reverse book-building allows investors to sell their shares at a price of their choice. It also gives the acquirer the freedom to accept or reject the offer. There is also a floor price which is higher of 26 weeks average price or last 2 weeks average price. It doesn’t end here. Only those companies can go for delisting where promoters hold more than 90% of shares. Many procedural aspects were also comparatively simplified. This turned out to be a boon for minority investors.

It is now evident that the regulation empowers the minority investors of today. The loopholes of price discovery and minimum shareholding by promoters are now plugged. The company who plans to delist is more likely to pay a higher price. Recent example includes companies like Atlas Copco and Sparsh BPO where huge premium was paid over market price. Having said this, the potential future gain by owning a good company for a long period of time is irreplaceable.

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