The Hindu Business Line : A litmus test on delisting front

Investment bankers say that the offer is likely to be priced at a modest premium to the current market price of Rs 870, rather than follow the fancy pricing (exit price of Rs 3,000 against a floor price of Rs 825) that had derailed the Astra Zeneca Pharma India's offer recently.

In the Astra Zeneca case, the acquirer refused to accept the exit price and preferred to remain a listed company. The shareholders of e-Serve will be using the `book-building' mechanism (similar to price discovery done in the Tata Consultancy Services pubic offer recently) to arrive at a fair exit price in this offer.

The pricing behaviour of shareholders in this offer is expected to be somewhat similar to Hewlett Packard's (HP) offer for Digital GlobalSoft in January this year. In that offer, the combined holding of institutional investors (Indian and foreign) was 36 per cent. These investors played a crucial role in bidding up the exit price for Digital at Rs 850, even though HP had indicated a willingness to accept shares only at a price of Rs 750. In the e-Serve's case, over 30 per cent of the equity is held by institutional investors.

There is another common streak running through e-Serve's and Digital GlobalSoft's offers.

In Digital's case, the company could apply for delisting if the public shareholding fell below 30 per cent while in the case of e-Serve, the Securities and Exchange Board of India has fixed it at 25 per cent.

HP, which held 51 per cent equity in Digital, succeeded in mopping up the required additional equity and delisted the stock.

Citigroup, which holds 44.4 per cent equity in e-Serve, will succeed in the offer if it mops up an additional 31 per cent equity from the public shareholders (including institutions).

The retail shareholders of e-Serve are not too pleased with SEBI's action. Mr Janak Mathuradas, a shareholder in e-Serve asks, "Why has SEBI fixed the delisting limit at 75 per cent, when the Takeover Code has already set it at 90 per cent. What is the difference between the two offers?"

Mr R.M. Ramanathan, former President of the Madras Stock Exchange and a small investor, highlights the plight of minority shareholders in Spencer and Company and says that the book-building process for delisting mandated by SEBI is of no consolation.

In February, Hilltop Holdings India made a book-built offering in Spencer and Company for voluntary delisting to buy out about 10 per cent of outstanding equity from the public. While the floor price was fixed at Rs 45, the book-built process arrived at an exit price of Rs 50 and at that price, the acquirer mopped up about 3 per cent of the outstanding equity.

Mr Ramanathan adds that the book-building process is appropriate only for frequently traded shares. In the case of infrequently traded shares and stocks such as Spencer that have not been traded for over 130 weeks, he says that only proper valuation by independent experts will uncover the right price.

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