Two days after promoter billionaire Anil Agarwal expressed his plans of delisting Vedanta Limited[1] from Indian stock exchanges, its Board of Directors approved the proposal in their meeting last month[2]. The proposal to delist comes at a time when the stock market is facing difficulties due to COVID-19’s effect on the Indian economy, and two years after Vedanta delisted from London Stock Exchange (LSE). With the pandemic hit in 2020, the risk calculations started to lose its track. The financial upheaval has brought the securities regulators across the globe on the doors of deliberation. Regulators including Security Exchange Board of Indian (SEBI) have concerted to collective cooperation with the International Organisation of Securities Commissions (IOSCO) Board to ensure lesser disruptions in capital markets in the ongoing scenario[3]. While the corporations claim to merely breathe in these economic conditions, they are not left without options. Liquidity and monetary inflow in continuum for corporations is the elephant in the room. Dealing with this challenge, the listed companies are resorting to delisting their shares from the stock exchanges. While Vedanta has publicly announced its delisting, reports suggest that United Spirits and Adani Power are still deliberating on it.[4]
Delisting as a feasible move
In the early years of this decade, UK witnessed a number of its corporations deciding to delist their shares from the Alternative Investment Market (AIM). In the then institutional and economic setting, the delisting trend bothered the Financial Services Authority (FSA) to take up necessary reforms to tame the delisting behavior. Why then do we say voluntary delisting in the current economic crisis is a feasible move? The simple answer is that when a company fails to get benefits of listing, it opts for delisting; then why not now?
With the grueling microeconomic impact, to maintain the balance in the capital structure of the corporations is difficult. One of the financial repositions corporations would want to take is to cut the listing costs at the earliest. This move will bring back the scattered shareholding into the hands of the designated few to ensure financial and operational control, which is undoubtedly crucial in times like these. The move is directed to re-establish a balanced capital structure of the company in the times when earning per share (EPS) is volatile. Once a company is listed on a stock exchange, it has to follow various regulations regarding corporate governance which often prove to be expensive and tedious. As was said in the official statement released by Vedanta, it is being done for “corporate simplification”. Despite this lens of sanguinity, delisting is a risky business decision that can take as long as half a decade and if it doesn’t fructify as per the plans, it can collapse the share price in its entirety, as was witnessed in delisting of Saushish Diamonds Ltd. Another example is Essar Steel’s delisting process which lasted for four years. The studies of market trends show that the effect of delisting is usually positive for gaining back control and ensuring financial and commercial flexibility in the hands of decision-makers of the entities.
Bare-bones of delisting
Let us understand what is delisting. A private company, in order to raise capital from the public, often chooses to go public i.e. list itself on a stock exchange. It, thereafter, becomes a public company. If the company wants to convert itself back into a private limited company, it will have to delist its shares from the stock exchanges from where it was listed. By delisting, it un-registers its securities from the exchange(s) and converts itself back into a private limited company. This involves stages of scrutiny and standardisation.
In India, delisting is regulated by the SEBI (Delisting of Equity Shares) Regulations, 2009[5], which speaks of both voluntary and compulsory delisting. Since Vedanta’s is a case of voluntary delisting, prior approval of the Board is necessary[6] and it should be followed by prior approval of the existing shareholders by special resolution through postal ballot[7]. The regulation prescribes that votes cast by public shareholders[8] in favour should be twice the votes cast against the proposal. If the proposal is passed, (which in case of Vedanta should not normally be a difficult task as less than 7 per cent shareholders are retail investors), the Board would have to appoint a Merchant Banker for carrying out all the functions of due-diligence and delisting[9]. Next in line is the in-principle approval of the recognised stock exchange[10] from where the shares are being delisted from, which, in this case, is both National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Within one year of such approval, a final application shall be made to stock exchanges.
The most important pre-requisite for delisting a company from all the stock exchanges is that the public shareholders must be given an exit opportunity[11]. Vedanta would then have to open an escrow account and deposit the total estimated amount of consideration calculated on the basis of floor price and number of equity shares outstanding with public shareholders[12]. It should be followed by a public announcement and within 2 days of the announcement, Vedanta must dispatch the letter of offer to its public shareholders[13] disclosing the offer price. Presently, the floor price has been set as Rs. 87.25 per share, which is being said to be unfair by Institutional Investor Advisory Services[14].
During the bidding process, public shareholders play an important role as only they are allowed to bid and the promoters are not[15]. The bid will be successful if the shareholding of the promoter and its affiliates increases to 90 per cent.[16] It must also be noted that the promoter has a right to not accept offer price. There are two cases when the delisting could fail: (1) promoter’s refusal to accept the offer price, (2) if the promoter shareholding post bidding does not reach to 90 per cent.
A closer look on the shareholding pattern of Vedanta Limited[17] evidences that the promotor group holds 50.89 per cent, foreign institutional investors (FII) 17.63 per cent, domestic institutional investors (DII) 29.21 per cent, mutual fund, financial institutions and insurance companies hold 19.89 per cent, while retail investors hold the minimum share of 6.92 per cent. Therefore, decision-making authority in no way lies with the retail investors.
Indicators of failed delisting
Public shareholders in Vedanta Ltd. own a little less than half the stake in the company. Approval from them would invite several round of negotiations and lucrative exit opportunities. If the public shareholders restrain from participating in the bidding process or refuse to vote in favour, then the delisting could fail like it happened in DIC India’s delisting where the required number of shares were not bid for in the reverse book-building process[18]. While the floor price is Rs. 87.25, the discovery price (final price after the bidding) will determine the way forward. There have been instances where the promotors have rejected the discovery price, like in delisting of Ricoh India[19] and Linde India[20]. Delisting is a risky decision as not only is it a lengthy process but also that there is uncertainty until the reverse book building process is actually completed.
As per a recent news report by LiveMint[21], many of the shareholders do not agree on the offer price of Rs. 87.25, including LIC which holds 6.37 per cent of the shares in the company. It is, therefore, speculative radar as to whether the delisting would be successful or not.
*Authors are pursuing Master of Laws (LL M) from NALSAR University of Law, Hyderabad, with specialisation in ‘Corporate and Commercial Law’. They can be reached at pratkgupta@gmail.com and samanvinarang@gmail.com.
[1] “Anil Agarwal Plans to Delist Vedanta from Indian Bourses”, Economic Times (13th May, 2020). https://economictimes.indiatimes.com/markets/stocks/news/anil-agarwal-plans-to-delist-vedanta-from-indian-bourses-at-rs-87-a-share/articleshow/75701282.cms.
[2] Aditi Divekar, “Vedanta Board Okays Delisting Plan”, Business Standard (19th May, 2020). https://www.business-standard.com/article/companies/vedanta-board-okays-delisting-plan-floor-price-per-share-unfair-says-iias-120051801684_1.html
[3] “Securities regulators coordinate responses to COVID-19 through IOSCO”, IOSCO, 24th March 2020. https://www.iosco.org/news/pdf/IOSCONEWS559.pdf
[4] Nikita Vashisht, “Vedanta, United Spirits: Why are firms opting to delist in the current mkt?” Business Standard (20th May, 2020). https://www.business-standard.com/article/markets/vedanta-united-spirits-why-are-firms-opting-to-delist-in-the-current-mkt-120052000530_1.html.
[6]. Regn. 8(1)(a), Delisting Regulations, 2009.
[7] Regn. 8(1)(b), Delisting Regulations, 2009.
[8] Public shareholders refer to the shareholders other the shares held by promoter group or its subsidiaries or affiliates or persons acting in concert.
[9] Regns. 8(1-A) and 8(1-D), Delisting Regulations, 2009.
[10] Regn. 8(1)(c), Delisting Regulations, 2009
[11] Proviso to Regn. 5, Delisting Regulations, 2009
[12] Regn. 11, Delisting Regulations, 2009
[13] Regn. 12, Delisting Regulations, 2009
[14] Aditi Divekar, “Vedanta board okays delisting plan; floor price per share unfair, says IIAS”, Business Standard (19th May, 2020). https://www.business-standard.com/article/companies/vedanta-board-okays-delisting-plan-floor-price-per-share-unfair-says-iias-120051801684_1.html.
[15] Regn. 14, Delisting Regulations, 2009.
[16] Regn. 17, Delisting Regulations, 2009.
[17]See Shareholding pattern of Vedanta Limited, https://www.moneycontrol.com/india/stockpricequote/miningminerals/vedanta/SG#sec_shrhldPat.
[18] See “DIC India stock plunges on failed delisting offer”, Hindu Business Line (21st October, 2014), https://www.thehindubusinessline.com/markets/stock-markets/dic-india-stock-plunges-on-failed-delisting-offer/article23153879.ece.
[19] See “Ricoh India down 20% for second day as delisting offer fails”, Business Standard (18th June 2014), https://www.business-standard.com/article/markets/ricoh-india-down-20-for-second-day-as-delisting-offer-fails-114061800203_1.html.
[20] See Yatin Mota, “Linde India Delisting Fails As Promoters Reject Discovered Price” Bloomberg Quint (25th January 2019),https://www.bloombergquint.com/markets/linde-india-delisting-fails-as-promoters-reject-discovered-price.
[21] See Jayshree Upadhya & Anirudh Laskar, “Vedanta delisting faces small shareholder snag” Livemint (21st May, 2020), https://www.livemint.com/companies/news/vedanta-delisting-faces-small-shareholder-snag-11590081387142.html.
