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Delisting Dilemmas

Three companies want to delist from the markets. Should investors accept the prices offered by promoters?

Even though the stock market is buoyant and the Sensex is hovering at around 20,000, companies such as Nirma, Binani Cement and Sparsh BPO Services have decided to exit from the market. All three have announced their plans to voluntarily delist from the bourses.

Binani Cement announced its delisting plan on October 6. Nirma followed soon after on October 9 and Sparsh BPO on October 11. But unlike the spate of initial public offers (IPOs), which reflect companies' desire to raise capital at good valuations in a buoyant market, there is no common reason for these companies' decision to delist. “These delistings are case specific and no common reason can be attributed to them,” says Jagannadham Thunuguntla, strategist and head of research, SMC Global Securities.

Reasons for delisting
All the three companies have their own reasons for exiting from the bourses. Nirma, which was primarily focused on consumer products, has diversified into other areas. The company's business has become more complex and asset heavy. In its statement issued to the Bombay Stock Exchange (BSE), the company stated: “With the changing economic environment, the company's profile is likely to change further towards entering into select early-stage and capital-intensive businesses. The nature and risk profile of these businesses may not be easily understood by and may not be appropriate for non-promoter investors. Further, such businesses may also have long gestation periods. Therefore, the acquirers are of the view that the next phase of the company's life cycle can be better managed as an unlisted company.” Moreover, the company's promoters are of the view that the present share value of the company doesn't reflect its true value.

In case of Sparsh BPO Services, the proposed delisting is intended to provide the promoters with increased operational flexibility in managing the business.

In case of Binani Cement, the promoter and holding company, Binani Industries, has decided to acquire its entire public shareholding.

What is delisting?
Delisting is the process by which a company's shares are taken off the stock exchange and trading in its shares stops thereafter. According to a Securities and Exchange Board of India (SEBI) directive, at least 25 per cent equity shares of a listed company must be held by the public. A company that wishes to delist must buy back shares from the public. This buyback is done through an open offer. Promoters must acquire at least 90 per cent stake to delist. The outstanding shares are purchased in the open market at a fixed price.

Delisting can happen in two ways: it is done either by the stock exchange or by the company itself. If done by the stock exchange, it is called compulsory delisting. In case of compulsory delisting, the stock exchange removes a company's shares due to breach of the stock exchange's legal requirements by the company.

When the company itself decides to go private and take its shares off the exchange, it is referred to as voluntary delisting.

The immediate impact
Once the delisting announcements were made, these companies' stocks rose significantly. Nirma's stock touched a 52-week high of `264.85, a jump of nearly 18 per cent (between the closing price on the day of announcement and the closing price one day after the announcement). Between October 1 and October 18, 2010, the stock delivered a return of 7.2 per cent.

Binani Cement's stock rose 3.9 per cent between its announcement date and one day after. Between October 1 and October 18, 2010, it rose 11.9 per cent.

Sparsh BPO Services' stock jumped 9.1 per cent between its announcement date and one day after. It also touched a 52-week high of `85.9 on this occasion. Between October 1 and October 18, 2010, it rose 27.3 per cent.

Track record
Financials. The detergent maker Nirma, which also forayed into businesses such as pharmaceuticals and cements, has registered a weak three-year compounded annual growth rate (CAGR) of 7.7 per cent in income and 2.7 per cent in profit after tax.

Sparsh BPO Services, a subsidiary of Intelenet Global Services which provides domestic call centre services, has been reporting a disappointing performance in the past two years: it posted a negative profit after tax (PAT) of `11.5 crore in FY09 and again a negative PAT of `5.9 crore in FY10.

Binani Cement posted a three-year CAGR of 38.8 per cent in income and 43.4 per cent in profit after tax (due to low base effect).

Valuations. Binani Cement is trading at a price-to-earnings ratio (P/E) of 8.9 which is slightly above its three-year median P/E of 7.68. Nirma is currently trading at a P/E ratio of 17.3 which is also higher than its three-year median P/E of 14.13. Sparsh BPO Services' P/E ranged at abnormal levels of 1,728.94 (April 2008) to 132.57 (June 2008). It is currently trading at -11.54, which is very unattractive.

Will the delisting be successful?
At the end of June 2010, the promoters held 64.91 per cent in Binani Cement, 77.17 per cent in Nirma, and 71 per cent in Sparsh BPO Services. Non-promoters held 35.09 per cent in Binani Cement, 22.83 per cent in Nirma, and 29 per cent in Sparsh BPO Services. Now out of these, non-institutions-non-promoters held 30.5 per cent in Binani Cement, 21.34 per cent in Nirma and 28.22 per cent in Sparsh BPO Services. Nirma has offered a price of `235 while Sparsh BPO has offered a price of `80 per share for delisting. Binani's management has not yet declared a price.

According to Garvita Chawla, analyst at Globe Capital Markets, “In case of Nirma and Sparsh, stock prices have shot up close to their 52-week high and higher than the open offer price. There is a possibility that the offer price may be revised upwards.” So, investors may not be willing to tender their shares at the existing offer price in expectation of upward revision of offer prices. According to Thunuguntla, “Companies like Nirma and Binani Cement may fail to delist because investors may not be willing to tender their shares (in hope of further rise in the offer price) and these companies may lack the ability to pay more. Of late, companies such as Goodyear India and Suashish Diamonds announced their delisting plans but failed to do so.” As for Sparsh BPO Services, as the company's performance has been poor, it may get delisted.

Recently, another company called AstraZeneca Pharma India shelved its plan to delist after its Indian shareholders voted against the proposal.

Should you exit?
Investors' decision should be guided by the price offered by the company. Says Chawla: “Generally it is advisable for shareholders to tender their shares if the company is offering a reasonable price. If they do not do so and the open offer is successful, they will be among minority shareholders. There will be no liquidity for the shares and no means of price discovery. Minority shareholders are then left with very few options for exiting the company. Further, if their shareholding is less than 10 per cent, this group of minority shareholders cannot approach the CLB (Company Law Board) for redressal of grievances. If the price offered is not reasonable, shareholders may collectively refuse the proposal.”

Shareholders should also look at the shareholding structure to determine who the other shareholders are. Out of the total public shareholding, a major chunk may be held by institutions which may tender their shares. If the promoters are able to garner 90 per cent shares from institutions, they will go ahead and delist. Retail investors will then find themselves reduced to the status of minority shareholders in the delisted entity.

In case the investor opts not to surrender his shares, he is entitled to regular dividends and bonus shares.