Exit Option: Investors Grope In The Dark

Updated: Sep 28 2003, 05:30am hrs
Numerous cases of delisting of shares by bluechip companies prompted the Securities and Exchange Board of India (Sebi) to set up an internal committee on delisting last year. The main concern playing on the minds of the investors was that the delisting was being carried out in a manner that leaves them with no choice but sell their shares, often at a perceived significant undervaluation. These guidelines were meant to protect the interests of the small investor as they played a major role in the decision-making process regarding the exit price and they could not be forced to accept the low prices offered by companies.

However, despite the delisting guidelines, there have been certain instances where companies are now trying to skirt the Sebi provisions and are taking refuge under the Companies Act to buy back shares and delist, say market sources. Add to this, a certain section of investors are still critical of the Sebi guidelines and are complaining that it is not up to the mark and still harms the interests of the small investor.

Take the instance of Dr MG Joshi who has holdings in nearly 500 companies. Dr Joshi, who is also a shareholder in Mather & Platt, attended the companys annual general meeting in Pune on September 1, 2003. There he was told that a Pune court has approved amalgamation of the company and shareholders with less than 500 shares will have to sell their shares to the company and exit. Dr Joshi alleges that when he demanded a copy of the said judgement, the company did not bother to comply. Dr Joshi avers that this is yet another tactic of the company to delist and vows that he will never sell.

This is not the first time that Dr Joshi has faced a situation like this. Even earlier, when the German company Mico had announced its intention to delist, Dr Joshi had received three offers from them which he turned down and recently he received a dividend of Rs 40 per share from them. Similarly, Dr Joshi had 125 shares of Bharti Telecom. The telecom company made around 7-8 offers to Dr Joshi to buy back its shares but he held on and finally the company gave him 120 shares of their sister company without any payment.

Says Dr Joshi: "Even if a fancy price is offered, I would tell my fellow investors not to sell their shares as the offered price will always be lower than the actual worth of the shares. That is why I will never sell my shares."

Then there is Rakesh Ahuja (name changed), who had bought 500 shares of Crompton Greaves Glass at Rs 4 per share in 1999, which was consequently bought over by Philips Glass. Later, the parent company of Philips - the Netherlands-based Koninklijke Philips Electronics NV decided to merge the glass entity with its Indian subsidiary - Philips India Ltd.

In the process, Mr Ahuja acquired 71 shares of Philips India. Sometime last year, Philips India Ltd decided to delist from Indian stock exchanges and started to buy back its shares. Mr Ahuja, as a shareholder, got an offer of Rs 103 per share to sell his 71 shares, which he promptly refused. In July 2003,

Mr Ahuja received a dividend at the rate of 15 per cent for staying invested in Philips India.

Mr Ahuja is very happy about his decision of not subscribing to the open offer of Philips India. The reason he points out that Philips India is a multinational and has the potential to do well in the future. Mr Ahuja further says that he had bought the shares for only Rs 2,000 and his investment has appreciated to around Rs 7,384.

However, this is not a happily ever after story where an investor -- like Mr Ahuja -- has reaped the benefits of his investments. According to market reports, Philips India is coming up with yet another open offer, but Mr Ahuja is unfazed and says that he will retain his shares even if Philips India gets delisted and will not sell his shares.

However, Dr Joshi and Mr Ahuja in their stubbornness have probably not bothered to look into the legalities. Under Section 395 of the Companies Act, the promoter can force a shareholder to sell his shares, if the consequent public holding is less than 10 per cent, after coming up with one more open offer. This means that Mr Ahuja will have to sell his shares to Philips India if its holding increases to 90 per cent, irrespective of his wish.

Rakesh Ahuja and Dr Joshi are not the only ones who do not want to part with their shares. There are scores of investors across India who share the same predicament.

In spite of wanting to retain their securities, a shareholder may not have the right to do so and may eventually have to sell out and that too at a price which may not be to their liking. In the past, there have been quite a few companies which have delisted. But, it has been noticed that in the process of delisting, shareholders have generally been given a raw deal with companies taking advantage of depressed market conditions to delist their stocks and buyback shares at a lower prices.

Last year, the Sebi committee on delisting to protect investor interests had recommended that for better price discovery of securities which are up for delisting, the book building route should be used through the stock exchange mechanism. The committee further recommended the framing of comprehensive guidelines for delisting, compensation through arbitration to the investors of delisted companies and a ban on delisting through schemes of arrangement and buyback.

Delisting through the book-building route expects the company wanting to delist to invite quotes through the stock market trading terminals within a fixed price band. The minimum price could be the average of the last 26 weeks (highs and lows) and the maximum price can be fixed by the company.

In this mechanism, investors wanting to subscribe to the buyback will be able to quote their price at which they are interested in selling their shares within the decided price band.

The investor will also have the freedom to quote a higher price than the maximum price offered. And only if the price is acceptable to the company wanting to delist, will its holding be accepted else, it can be returned.

However, investors are still in doubt over the actual working of these guidelines. Says Arun Kejriwal of Kris: "The Sebi recommendations are only on paper and does not hold any water. The reverse book building route which Sebi has suggested has not taken off."

To add weight to his opinions, Mr Kejriwal cites the example of Madura Coats which is now a delisted company. Madura Coats has taken refuge under Section 100 of the Companies Act which states that a company can buy back its shares at the same price that the company had come up with at the time of its open offer.

Currently, Madura Coats is sending out cheques of Rs 40 per share to its investors and cancelling their shares. This is the worst kind of iron rule that an investor can be subjected to, rues Mr Kejriwal.

Moreover, Madura Coats is not a case in isolation. Even Sandvik Asia has resorted to such a step, say market sources. SD Israni, a company secretary, is of the view that Madura Coats can voluntarily cancel shares by sending out cheques only and only if these clauses exist in the terms and conditions, which may have been approved by the shareholder at the time of sale of Madura Coats securities.

However, Pratip Kar, executive director - secondary market and the head of the delisting committee, Sebi, when contacted was not available for comment.

Says, Vipul Modi, secretary of the Investor Grievances Forum and a member of the committee on delisting: "After the delisting guidelines, which were very transparent and investor-friendly, came into force, there is not a single company which has delisted and this shows that the guidelines have worked. But now, certain companies are taking shelter under the Companies Act and are trying to create mischief."

Still, the big debate here is not related to the way a company is delisting or why a company is delisting. The crux of the matter is the exit price that a shareholder gets if a company gets delisted. Says Jayant Thakur, a chartered accountant specialising in the Securities and Exchange Board of India (Sebi) laws: "The main issue connected with delisting is the exit price and even after so many years, the whole process is tilted towards companies. The valuation of shares should be done on the basis of current listing and there should be a proper price determination formula with the exit value referred to the valuer on the assumption of full listing."

According to Mr Thakur, the moment a company declares that it wants to delist from the exchange, the price of its securities usually takes a beating and the company gets the benefit of buying back the shares at a lower price. "Investors usually get panicky and would not like to hold on to a security which is getting delisted and normally end up selling their securities at whatever price is offered. Shareholders are asked what price they will offer for shares that will soon be delisted. It is but obvious that the price will be tipped to be on the lower side," reiterates Mr Thakur.

Ambreesh Baliga, vice-president of Karvy Stock Broking Ltd, says: "In some cases of delisting, the only beneficiaries are the promoters and the money put in by investors in the particular stock will just go waste."

Mr Baliga further says that the corporate veil needs to be lifted. There are instances where scrips have got delisted on account of issues such as non-payment of listing fees or non-compliance with the necessary rules and regulations required for remaining listed. "In some cases, promoters do not comply with the rules deliberately and therefore, in such cases the promoters should be held liable and penalised for it rather than delisting the company which, in the bargain, penalises the investor."

However, there are others like Hitesh Seth of Prabhudas Lilladher who feel otherwise. According to Mr Seth, an investor does not lose out in the delisting process as the company gives the investor a prior notice and an opportunity to opt out.

A company usually gets listed for the first time on the stock exchanges by offering its shares to the public, who subscribe to the shares with the assurance that the listed shares will garner a fair price on the basis of wide liquidity. Even investors who later buy in the secondary market keep the same faith in mind.

Nevertheless, companies will also want the option to get their shares delisted as staying listed over a period of time may not make sense to them. A company may choose to delist keeping in mind the various responsibilities attached to being a listed company like disclosure norms and corporate governance requirements. Many of the MNCs have gone for delisting over the past few years through the open offer or buyback route. And many Indian companies have also followed suit.

The securities of many of these MNCs and domestic companies were pretty liquid stocks. Market sources fear that if voluntary delisting by good companies continue, then Indian investors will lose out on opportunities to invest in some good quality companies most of which are subsidiaries of MNCs. At the same time, the absence of these companies from the bourses will lead to a lack of depth in the market.

Moreover, given the fact that investment options are shrinking thanks to the falling interest rate regime, investors are caught in a a quandary.