What is share delisting?

What is share delisting? Why are companies like Vedanta and Adani Power delisting

Introduction

Recently, we have heard about companies like Vedanta, Adani Power, Hexaware Technologies ,etc planning to delist their shares from stock exchange. Let us understand about share delisting and why companies go for share delisting. We will also look at the process of delisting and if retail investors should trade to get delisting gains.

What is share delisting?

• Delisting is basically permanent removal  of stocks from the stock exchange. A company buys out all its publicly listed shares and the company is no longer available for trading.
• There are two types of delisting as shown. Let us discuss them one by one.

• Involuntary Delisting – It is a forced removal of company from stock exchange for reasons like if company fails to adhere to the regulatory norms, faces corporate governance issues or if it is not financially viable and on the verge of bankruptcy.

• Voluntary Delisting –  Here the promoter willingly decides to remove the company from stock exchange.

• Let’s say a promoter has 50% stake in a company. So from the remaining shareholders, promoter should acquire additional 40% stake from public shareholders.
• Promoter has to offer a premium to current price to buy back the shares from the remaining shareholders.
• The share delisting is considered to be successful only if the promoter shareholding and shares tendered by public shareholders account for 90% of the total equity capital.
• This is a quite lengthy process. For example, Essar Oil took four years to delist from Indian stock exchanges. This was due to the regulatory hurdles and opposition from shareholders.
• Let us take a look at the process of delisting

• Reverse book building is a price discovery mechanism in which merchant banker takes bids from current minority shareholders. Final bid price (usually > market price) is then fixed based on the basis of nature of bids.
• Let us take a look at delisting of Vedanta and Adani Power to understand the delisting process better.

Vedanta and Adani Power Delisting

Why is Vedanta delisting?

• The main reason is to simplify their corporate structure. Company basically wants to reduce the number of associated companies with Vedanta group.
• This is quite evident from their past actions like merger of Sterlite and Sesa Goa , Delisting of Vedanta Resources from UK terminal, etc.
• Another reason can be the not so attractive valuations that company is getting from institutional investors resulting suppressed stock prices. For example, Vedanta trading PE of 4x as against its historical median PE of 8.5x.
• Company might think of taking advantage of suppressed valuations to buy back its shares as it will not have to pay much premium.
• By delisting, company will not have to distribute profits to the shareholders in the form of dividends.
• This will help Vedanta to reduce their debt and restructure their business.

Updates on Vedanta delisting

• Vedanta has given an indication of INR 87.5 to delist the shares. This was at ~10% premium when the company made announcement. But, after the announcement the stock price rose past the given price.
• On 24th June’20, firm got shareholder’s nod for delisting. This is an approval required to proceed with the delisting process . But it does not mean that the shareholders agree on the offer price.
• It seems unlikely that the firm will get delisted at its offer price of INR 87.5 as the stock has soared way past the offer price. .
• Vedanta would now make public announcement and dispatch letter of offer to its existing shareholders. Through this process it will receive bids for delisting from current minority shareholders
• The offer price discovery through reverse book building process is likely to happen at higher price levels.

Why is Adani Power delisting?

• The main reason for delisting is to enhance the company’s operational , financial and strategic flexibility.
• This is in line with company’s objective to invest in newer geographies and business activities, which may alter the risk profile of the company.

Updates on Adani Power Delisting

• Adani Power gets a nod from its shareholders for delisting its shares.
• Company has listed offer price of INR 33.82 per share. This price is currently at a discount to the current market price of INR 35.

Financials of Vedanta and Adani Power

• As seen from the table, Vedanta has a book value of INR 147, hence ideally it should not get delisted at a lower price than its book value.
• Since Adani Power has incurred losses, its book value is negative and could not be considered as base price for delisting.
• Vedanta has better return ratios as compared to Adani power, however overall the return ratios of both companies are not that healthy.
• The main reason for this could be high debt levels of Vedanta ,which is evident from its high D/E and lower profitability of Adani Power.

Should retail investors trade for delisting gains?

• As mentioned above, delisting process takes a lot of time and approvals to get finalized.

• We do not suggest investors to take part in such trades as these are more of speculative trades and involve high risk.