This article is written by Shivani Panda, from Amity Law School, Delhi. Here she discusses the delisting of shares of Vedanta in India and their rationale behind this action.
With the spread of COVID-19 and the lockdown implemented as a measure to contain further spread of the disease, the world has come to a complete standstill. As a result, the economy and businesses all over the world have taken a substantial hit. Despite continued reassurance from the government, the companies are trying to liquefy and privatize their firms to take control over its operation. One such company is Vedanta Resources Ltd. (VRL), a global metals and mining company, which announced its plan of voluntarily delisting its Indian unit, Vedanta Ltd. (Vedanta) from the Indian stock exchange. In this article, the author will put forth the details of the strategies of the company behind this step and the effect it will have on the stock market.
Bare-bones of delisting
The step taken by Vedanta can be understood only when the meaning of delisting is clear to the readers. A private company, to raise capital through shares and debentures, lists itself on a stock exchange and converts to a public company. Thus, to turn itself to a private company again, it has to delist the shares from the stock exchanges where it is listed. Delisting generally opts when companies plan to expand, restructure, or raise the stakeholding of their promoters. However, it is a complicated and time-taking procedure. A company is thoroughly scrutinized in every stage of the process by its stakeholders and various authorities.
Delisting in India is governed by the Stock Exchange Board of India (SEBI) (Delisting of Equity Shares) Regulations, 2009, which was last amended in 2019 in an attempt to simplify the delisting procedure. These regulations apply only to the equity shares of a company that are registered in Recognized Stock Exchanges (RSE). The SEBI Regulations lay down two types of delisting, involuntary and voluntary delisting, which are discussed in detail here.
When a regulatory authority forces or penalizes a company to shut down, it is trading of shares, where the investors do not have the opportunity to vote against such delisting, it is called involuntary or compulsory delisting. In this type of delisting, the promoters are required to purchase the shares from the public shareholders as per the fair value of shares, calculated by an independent valuer. Fair value (FV) is the estimated market price of stock valued at the time of its calculation. The reasons for which a company is compulsorily delisted as given under Rule 21A of the Securities Contract Regulations Act, 1956 (hereinafter SCRA), are as follows:
- Failure to maintain the requirements set by the SEBI.
- The company has incurred losses for three consecutive years and has a negative net worth.
- The shares are suspended from trading for more than six months or being traded infrequently over the last three years.
Other reasons for such delistings are:
- Non-payment of listing fees and non-compliance with listing requirements and agreements.
- The promoters or directors indulge in insider trading or unfair trade practices in securities. Further, if they indulge in the malpractices in the dematerialization of securities, such as issuing excess securities or trade the securities for which permission is not granted by the authorities.
- The addresses of promoters or directors of a company are not known or are in contravention of the Companies Act, 2013.
When a company decides on its own to remove or delist its shares from all the RSEs established in the country, it is known as voluntary delisting. The company pays the shareholders to buy-back the shares held by them. Voluntary delisting is of two types:
- From all the RSEs, where it is compulsory to give exit opportunity to the public shareholders.
- From one or more RSEs of the country, where exit opportunity is not necessarily given to the public shareholders.
Exit opportunity is a mechanism, where during the voluntary delisting, the exit price of the shares is determined by the promoter of the company, according to the reverse book-building process. Voluntary delisting of shares could be due to one or more of the following reasons, other than expansion or restructuration of the firm:
- The company has suspended its business or has become a sick industrial company.
- The company finds itself incapable of paying the listing fees to the stock exchanges and is disproportionate to the benefits accruing to the company or its stockholders.
- Misunderstanding between the holders of the securities due to regional differences.
- Acquisition of a company by an investor who is looking to hold a majority share. In India, it is compulsory in a public company that at least 25% of the shareholding be available to the public. Thus, if an investor wants to acquire more than 75% of the holdings, it may apply for the delisting of the company.
The procedure of voluntary delisting
A voluntary delisting takes place only when the shareholders who hold up to 90% of the share capital agree upon the delisting offer made by the company, which shall be passed by a special resolution. Once the shareholders, promoters, and the company’s board of directors (BOD) agree with the delisting process, the process of reverse book building or exit mechanism starts with a public announcement of such delisting. The procedure as laid down under the SEBI regulations are as below:
- Appointment of a merchant banker: The first step towards the delisting of shares starts with the appointment of an independent merchant banker, who will supervise the reverse book-building procedure. The merchant banker must carry out the necessary and make a report under Rule 8 of the SEBI regulations, that is to be submitted to the RSE and the BOD.
- Setting up of escrow account: Under Rule 11 of the SEBI Regulations, the promoters or acquirers are required to open an escrow account to deposit the total estimated amount calculated based on the floor price and a number of equity shares outstanding with the shareholders. When the final price is calculated after bidding, the additional amount shall be deposited thereon.
- Initiation of the reverse book building process: The merchant banker shall initiate the book building process to set a price to attract the investors into agreeing to the delisting. The price is set by online bidding organized by the merchant banker. SEBI is required to set a floor price, which is the minimum price the company has to offer to the shareholders, however, there is no maximum limit. The floor price is the average of weekly closing highs and lows of 26 weeks or of the last two weeks, whichever is higher.
- When the delisting is successful: Delisting can only be successful when the 90% of the shares of all the shareholders have gained approval by making an offer to the existing shareholders to buy the shares from them at a premium, which shall be equal or higher than the floor price. After the closure of the offer, the promoter shall make a public announcement within 5 working days about the success of the offer. The shareholders shall be paid the final price within 10 working days from the closure of the offer. However, if the offer is not successful, the same shall also be announced and no final application to the exchange shall be made for delisting of shares. Further, the escrow account shall be closed and the amount deposited there by the company shall be added back to the business.
- When shareholders refuse to sell: If the shareholders do not take part in the reverse book-building procedure, they still have the option to sell their shares back to the promoters within a year from the date of closure of the delisting process at the same exit price determined through the reverse book-building procedure. However, if the shareholder doesn’t sell the shares back within a year, it will turn into non-tradable securities and the company cannot be mandated to accept those shares.
Reasons for delisting Vedanta Ltd.
The parent company and the promoter of Vedanta, VRL, announced its decision of delisting the company from all the Indian stock exchanges, two years after it delisted from the London Stock Exchange (LSE). It made an offer price of Rs. 87.50 to buy back minority and non-promoter shareholding in Vedanta. While the offer is at a premium of 9.9% from the closing price of Rs. 79.6 on May 11, 2020, in accordance with the regulations provided by the SEBI, an analysis of the company’s book paints another picture. The company’s book value stands at around Rs. 215 per share with Rs. 180 being the 52-week high price. The depression in the economy due to the pandemic led to a drastic fall of 40% of the price of shares in 2020. With the increase in the share price post the offer, the cost of buy out of the shares has also increased from Rs. 16,000 Cr. to Rs. 20,000 Cr. However, it is not the final and sacrosanct price, and it will be decided after the online bidding and reverse book building.
According to the promoter group or the parent company, the buy-back of shares is the last leg of “corporate simplification”. Privatizing a company is the easiest way to gain control over the operation of the company and improve economic flexibility to its natural resource and mining businesses. Further, the steep decline in the oil prices due to the spread of the virus led to hue and cry across the natural resources, metals, and mining industries, which resulted in the fall of the stock price.
However, in the post-COVID era, there is tremendous growth potential in the oil industry, thus, delisting during a crisis could be a great method to gain control at a lower price. The delisting will further help its parent company to pay back its debt, which is over Rs. 10 billion along with regular interest payments, which will further save cash reserves of the company. Thus, this will lead to the company’s debt reduction and looks like a positive move towards the growth of the firm. However, Vedanta has cash of Rs. 35.20 Cr. against the total debt of Rs. 58.589 Cr., which is sufficient to cover 60% of its total debt. It has also planned to raise $2.75 billion to fund the delisting. But its cash reserve of Rs. 22,535 Cr. in Hindustan Zinc is not yet accessible since the government has not allowed its merger with Vedanta.
Currently, VRL holds 50.14% of the company’s share, whereas, other retail investors hold about 49.86% of Vedanta’s share. The biggest institutional shareholders of Vedanta, such as ICICI Prudential Mutual Fund, HDFC Trustee Co. Ltd. SBI Mutual Fund and Life Insurance Corporation of India are disappointed with the offer price of the shares and termed it extremely opportunistic. Further, most of the minority shareholders generally do not show any interest in the bidding process, making it convenient for such companies to bend the laws and get away with it. The lack of a proper legal framework to safeguard the interests of the investors adds fuel to the fire.
The delisting will tremendously benefit the company in the long run but it will also be interesting to see the effect it will have on the stakeholders. Most companies stick to conserving money and increasing cash flow in the business but Vedanta seems to take an unconventional step to survive the pandemic. While delisting a natural resource and mining giant at low valuation appears to be a smart business move, investor protection takes a backseat with no adequate legal framework safeguarding their interests. It is evident from the delisting of companies in this decade, such as Essar Ltd., that it is a time-consuming process, which requires various approvals and paperwork. Thus, if the process will benefit the company at all or will become a burden, is a matter of interest for many business analysts.
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