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Shrinking Avenues

The delisting of MNCs from Indian bourses is a cause of concern for investors and fund managers. More so MNC-specific funds will be hit since their investment universe has become restricted

Five years ago, a brokerage house carried a report on the trend of multinational companies (MNCs) buying the shares of their Indian subsidiaries from the domestic market. The report, compiled in September 2002, stated that the trend was disturbing because most of the offers had been made with the intention of delisting the company from the Indian bourses.

Well, history does repeat itself. And now, this trend has been a cause of concern for investors and fund managers. All mutual funds will feel the crunch as the number of MNCs decreases. But more so, MNC-specific funds like Birla MNC, Kotak MNC and UTI MNC. These three funds were launched in 1998-2000, when MNCs were doing well. Now, with an increase in the number of firms being delisted, their investment universe is restricted.

The investment mandate of the funds states that they can only invest in Indian companies in which a foreign company acquires a stake in them. Or in companies that have a multinational parentage and a foreign holding. For instance, Bharti Airtel features in the portfolios of these funds. The reason it falls into this mandate is because Singapore Telecom has a stake in the company and an on-board representation too.

In the near future, either via a buyback (outright or continuous) or open offer, companies will acquire shares from minority shareholders and eventually go in for voluntary delisting. Alfa Laval, AstraZeneca Pharma, Atlas Copco, Bayer Diagnostics, BASF, Bosch Chassis Systems, Castrol, Fulford, Henkel, ICI, iFlex Solutions, Ingersoll-Rand, Pfizer, Novartis, Matrix Labs, MICO, Monsanto, Mphasis BFL, Honeywell Automation, Rayban Sun Optics, Syngenta, Timken are potential stocks which have high promoter holding. A number of these are already the prominent holdings in the MNC funds as well as other equity funds.

Of course the funds will definitely benefit from buybacks. But over the long run, this will hit them hard as they exit from lucrative stocks and see their pie shrink. Birla MNC, for instance, once invested in Digital Globalsoft and e-Serve International, both of which have been delisted.

Delisting is a process by which the company goes private by permanently removing its shares from a stock exchange. Once delisted, the shares of that company can no longer be bought or sold on that stock exchange. If the company does not abide by the rules and regulations of the stock exchange with regard to filing and disclosures, it can be compulsorily delisted. But a company may also decide to voluntarily delist from the exchange. According to Securities and Exchange Board of India (SEBI) guidelines, a stock can be delisted only if the minority shareholding falls below 10 per cent and promoter threshold level is 90 per cent.

According to reports on the new rules for voluntary delisting for companies, the promoters will have to acquire at least half the public holding, in addition to a minimum 90 per cent promoter holding.

So if a promoter holds 30 per cent, he will have to buy 35 per cent (half of 70 per cent) and an additional 25 per cent (to reach 90 per cent). If he already owns 90 per cent, he will have to buy 5 per cent (half of 10 per cent). If he owns 81 per cent, he will have to buy 9.5 per cent (half of 19 per cent).