• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Krishnan Thiagarajan

The delisting guidelines, in their present form, suffer from certain anomalies relating to the delisting threshold, glitches in the reverse book-building process and gaps in the procedure to follow when delisting fails. SEBI's decision to review and tweak the guidelines to factor in these aspects will come as welcome news to investors.

THE Securities and Exchange Board of India's decision to review the delisting guidelines of February 2003 is bound to come as a relief to the companies and the investors whose interests will be affected by this process. Given the loopholes exposed in the delisting guidelines, the onus is entirely on SEBI to re-examine the rules at the earliest.

With the benefit of experience from the 10 reverse book-built offers put through under the existing guidelines, some fundamental changes that need to be made in the delisting framework are:

Delisting threshold

Voluntary delisting under the delisting guidelines is no different from a takeover under the SEBI Takeover Code. Under the Code, if the public shareholding falls below 90 per cent, the acquirer can apply for delisting the stock. Hence, 90 per cent is an acceptable threshold for delisting.

Since voluntary delisting achieves the same objective as a takeover, there was no reason for SEBI to peg the delisting threshold at a lower level of 75 per cent in the case of e-Serve International in August or 70 per cent in the case of Digital GlobalSoft in early 2004.

Second, by lowering the delisting threshold, price discovery under the reverse book-building process may also be affected in some way. Take e-Serve International. In this case, the promoters held 44.4 per cent of the equity, with a little over 30 per cent held by institutional investors.

Since 75 per cent was the delisting threshold in this case, there was a possibility of the institutional investors calling the shots in this offer and the retail investors being forced to follow their cue in price discovery.

So, if SEBI's intention is to protect the interest of the investors, it has to fix the delisting threshold at 90 per cent under the delisting guidelines also.

Gaps in reverse book-building

The efficacy of the reverse book-building process has been established to a large extent in the latest e-Serve International offer. There appears no need for SEBI to tinker with this mechanism. There are, however, minor glitches in procedure that need to be ironed out.

Of the 10 reverse book-built offers put through so far, those of Astra Zeneca Pharma and Vickers Systems International were rejected by the acquirers (or promoters) as the discovered price was unacceptable to them.

In Astra Zeneca Pharma, the reverse book-building process discovered a price of Rs 3,000 compared to a floor price of Rs 825 fixed by the promoters. This price effectively translated into a price earnings multiple of 60 times its latest 2003 earnings.

Similarly, in Vickers Systems, the maximum number of bids was placed at Rs 185, compared to the floor price of Rs 70. In both the cases, the acquirers were buying up the residual equity from the shareholders above 90 per cent.

This clearly highlights a loophole in the reverse book-building process that is exploited by a section of shareholders. From the Astra Zeneca offer, it appears that a few shareholders, bidding at unrealistically high prices, can derail the process of rational price discovery. On account of such shareholders, others who could have exited at a reasonable premium to the market price are also denied the opportunity to do so.

SEBI will have to explore a feasible option by which the acquirer can offer an exit price to the shareholders based on the second highest price at which the next highest number of bids is made.

This course of action may be meaningful, especially for all voluntary delisting offers by promoters whose holdings cross 90 per cent. Otherwise, the process will be stuck in an unending loop. SEBI also needs to consider whether fixing of price bands, with a floor and ceiling price will help in such cases.

If this trend continues, the promoters may, in desperation, be forced to set up a subsidiary to route all their high-value products and let the original company's stock remain illiquid.

Procedural nuts and bolts

The SEBI delisting guidelines are not clear on the minimum public shareholding requirement, if and when a delisting offer fails. It does not specify whether the stock will remain traded as it was before the offer. Or if it should be pegged up to the minimum public shareholding required for "continuous listing" purposes, which may vary from 25 per cent, in most cases, to 10 per cent, in some cases.

Similarly, SEBI will have to decide whether a cooling-off period (the minimum time between two reverse book-built offers) is necessary in these offers to protect investors' interest. Without this, prices may tend downwards in subsequent bids.

For instance, studies of the `auction mechanism' in telecom licences or spectrum auctions show that when somebody bids in a sequence, the second and consequent rounds of bidding are generally at lower prices than the earlier rounds. This phenomenon is called the `price-decline anomaly' in economic theory.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Investment quiz

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line