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ZappChai Explainers - Delisting

Mr. Donald, the promoter of Donald Towers, a real estate entity listed in BSE, wants to expand his business by diversifying into healthcare. However, he is pretty sure the people who have brought his company’s shares will be less than pleased with this sudden foray into an unknown sector. So he decides to buy back Donald Towers’ shares from these minority stakeholders to increase his ownership from the 54% he currently owns to take it to above 90%. Donald announces an indicative share price of Rs 200 in the media at a premium to the existing price of Rs 175 on BSE. However, that is not the final price that the public shareholders will get paid.

That price is decided by following a detailed regulatory process. Donald appoints a merchant banker, Pompei Brothers to oversee the electronic bidding. Pompei Brothers and Donald then advertise the share buyback offer for Donald Towers and sends a letter detailing the minimum price (called the floor price, which is the average of weekly closing highs and lows of 26 weeks or of the last two weeks, whichever is higher) of Rs 175 for the buyback to all public shareholders. BSE conducts a transparent auction so that the existing shareholders are not shortchanged by Donald. BSE facilitates this through a reverse book building process - a fully automated online bidding system. Shareholders who hold shares can approach trading members (such as ICICI or Karvy) to relay their bids to Donald Towers.

After the offer closes, all the shareholder bids are aggregated and the final buyback price for Donald Towers is discovered where Donald, the promoter, hits 90% of the ownership - which is Rs 240 in this case. Once the price is finalized, all offers below or equal to Rs 240 will be accepted. The buyback offer is termed successful only if a minimum number of shares, as defined by regulation 17 (A) of the Delisting Regulations, are tendered by shareholders and accepted by Donald Towers.

Those investors who fail to participate in the reverse book-building process have the option of selling their shares to Donald. He is under an obligation to accept the shares at the same exit price of Rs 240. This facility is usually available for a period of at least one year from the date of closure of the delisting process.

So if you are a shareholder in Donald Towers, why should you be interested in all the information above? Given that delisting is often concluded at an exit price that is above the prevailing market price for a stock (compare Rs 175 to Rs 240 above), delisting rumours have been known to send some stocks into the stratosphere. Donald has to pay this increased price to validate his hypothesis that the market is not doing Donald Towers’ expansion plans justice or he does not want to share the value he can create with his minority shareholders. However, if Donald decides not to delist after making the announcement because he feels the final buyback price is too high, the price of Donald Towers may crash to unprecedented levels. Just look at the story of Suashish Diamonds whose share price crashed from a price of Rs 395 after the buyback announcement to Rs 171 when the promoters withdrew the delisting offer.

Last but not the least, should you buy a stock which is being delisted? First, you should not buy a stock just because it is going to be delisted - focusing on business fundamentals is the way to go. Moreover, if you have not tendered the shares during the final buyback, you might end up holding non-tradable securities. The only resort in such a case is for you to either write to the company for buying back the shares or sell to a firm that trades in non-tradable securities. And we have not even talked about what happens in case of litigation - some of Cadbury’s shareholders, which was delisted in 2003, were finally paid their fair value in 2014.

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About the Author: The post is written by our EZPP Partner Abhirup Roy with relevant edits from our editorial team. Abhirup is a graduate from IIM Ahmedabad and works with Zolo Stays.


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