Lead Story: SEIZE THE OPPORTUNITY

The New Year has not given retail investors much to cheer about. A bouncy pitch to bat on coupled with a cloudy climate have made life difficult for most. Worse, things are unlikely to improve in a hurry. It makes sense therefore to play with a straight bat and preserve your wicket. And if you hang in, the boundary balls will come. In the current stock market scenario, delisting offers are those boundary balls you need to cash in on to keep the returns flowing, says the ET Intelligence Group

etail equity investors are in a difficult situation. The Indian stock market, in a downtrend for more than a year, has lost over 25% and figures among the world’s worst performers. The bad news is far from over though. Apart from macroeconomic troubles like the slowing economic growth and mounting budget deficit, a sharp depreciation in the rupee over last three months has opened up another avenue of woes for Corporate India. Analysts are already sceptical about India Inc’s performance in the second half of FY12.
These uncertain times call for retail investors to adopt defensive strategies. It is important to focus more on avoiding capital erosion now, rather than looking at spectacular returns. Investors should look for potential delisting candidates - fundamentally strong scrips that won’t fall too much in a weak market, but offer potential for opportunistic gains. Some recent examples demonstrate how investors stand to gain even in times of economic uncertainty when companies decide to buy back their own shares in a bid to voluntarily delist. UTV Software, Alfa Laval, Carol Info, Patni Computers and Ineos ABS have all generated hefty returns for longterm investors defying the overall market weakness in the second half of 2011. 

IS IT POSSIBLE TO PREDICT DELISTING CANDIDATES? Delisting shares from the stock exchanges is a unique decision in a company’s life. And it is almost impossible to forecast. These decisions depend greatly on the owners and management and their way of thinking. At least, one can’t predict the timing of a delisting offer.
We at the ET Intelligence Group have therefore put together a group of companies with certain common parameters that make them more likely to opt for delisting than others. These are MNC associates with parent companies operating overseas. Secondly, and most importantly, the promoters hold more than 80% in the Indian arms. Thirdly, they don’t need to raise capital in India. Or, in other words, being listed in India doesn’t serve them much purpose.
With market regulator Sebi or the Securities and Exchange Board of India mandating that all listed companies have to increase public shareholding to a minimum 25% by June 2013, these companies have to take a conscious call sooner or later on whether to reduce promoter holding or go for delisting. 

WHY MNCS ARE MORE LIKELY TO DELIST Compared to domestic companies MNC associates in India are more likely to choose to delist when faced with the dilemma of whether to dilute promoter stake to meet local regulations or delist. Most of these companies were listed in India not due to a need to raise capital, but more to meet the then prevailing FDI norms. For such companies complying with the cumbersome and timeconsuming rules and regulations of Sebi and the stock exchanges makes little sense. Be it fund raising or M&As, any major decision takes substantial time for a listed company compared to an unlisted one. Finally, the current depressed market conditions offer an ideal opportunity to delist.
This is not to say MNCs are the only delisting candidates. In fact, over a period of time a number of unexpected Indian companies such as Nirma and Binani Cements have gone ahead with delisting processes. In a number of cases, acquisition by a foreign player has proved a prelude to delisting. For example, Sparsh BPO. However, MNCs are the more predictable candidates. 

ONGOING OFFERS A number of companies have already begun the process of voluntarily delisting their shares from Indian stock exchanges. In most cases ETIG analysts recommend that the shareholders should avail of the attractive prices and tender their shares in the open offer. After all, a retail shareholder won’t have much use for shares in a company once it delists. At the same time, the profits booked here can be invested in other avenues.
If one does not already hold shares in these companies, buying right now, however, may not be a correct strategy. It is true that the shares can still generate some 5-10% return by the time delisting takes place. However, the risks involved that don’t justify buying now. If the delisting offer fails due to any reason, the stocks could correct heavily. 

How does a delisting offer work? The process of voluntary delisting begins when promoters of a company inform it of their intention to buy all outstanding shares and delist the company. The board of directors approve the same and inform the stock exchanges. Subsequently, the shareholders, excluding the promoters, have to approve the delisting process with a two-third majority. Once the approvals are in place, the delisting process takes place in a reverse book building format. Under this the shareholders convey the price at which they are willing to sell their shares to the company. For this purpose, the company sets a ‘floor price’ in accordance with Sebi rules, above which the bidding takes place. In a number of cases, companies voluntarily offer a higher price to draw investor interest. This is called ‘indicative offer price’. However, the shareholders are free to bid at whatever price is reasonable according to them. To successfully delist the shares, the promoters need to acquire at least 50% of the outstanding shares and take their holding beyond 90% of the paidup capital. Once the shareholders submit their bids, the company finds the price point at which the requisite number of shares can be acquired. This is called the ‘discovered price’. Finally, it is the prerogative of the promoters whether to accept the discovered price. There have been instances where aggressive bidding by retail shareholders has taken the discovered price beyond the promoters’ acceptance limit. As a result the delisting failed. It is impossible to predict what the promoters will accept finally. In several cases, the promoters have given a substantial premium over the floor price to make the delisting offer successful. If the promoters accept the ‘discovered price’, or the delisting offer succeeds, the same price becomes applicable to all shareholders tendering their shares. This is followed by cessation of trading for the scrip on bourses. The company has to offer the same price to any shares tendered to it up to one year after the delisting date.