Home / Delisting- A Boon or Bane the Small Shareholders
Delisting- A Boon or Bane for the Small Shareholders
In a country like India, wherein lakhs and lakhs of people invest in Primary as well as Secondary Markets, protection of the interests of these investors becomes an inherent job for the Regulators, at all forums.
With the same intent in mind, the Securities and Exchange Board of India Act was enacted in the year 1992. The Act established a Board, called Securities and Exchange Board of India (SEBI), to protect the interests of investors in securities and to promote the development of and to regulate the securities market. It acts as a regulator for the development of securities market in the country.
At present, appx. 9,000 Companies are listed on various Exchanges in India, out of which only appx. 3,500 are being actively traded. Trading being taking place only at BSE/ NSE. Others are either not being traded or have become illiquid. The question that arises is what should such investors do, whose investments become illiquid and who had invested in a particular company on the basis of the faith and trust in the system and also on the basis of the contents in the prospectus which mentions that the security would be listed on stock exchanges. Once he subscribes to the issue, he takes an irreversible decision, as the promises in the prospectus are irreversible. And if the securities of such a company get delisted, his investment will no longer be marketable and tradeable. And then, on top of it, these companies have themselves delisted either themselves or the Exchanges delist them for non compliances or not meeting the criterion. In such circumstances, the shareholders are left in lurch with no option but to tender their shares at whatever price, which may be much lesser than the actual value of the Company. As a corollary to this, the fundamental question that arises is: is delisting of securities a boon or a bane for the shareholders? The same has been attempted to be answered in the coming paragraphs. Eversince the promulgation of SEBI Delisting Guidelines 2003, many a companies have got themselves voluntarily delisted. They have paid their shareholders according to the higher of the average of the weekly closing highs and lows for 26 weeks or 2 weeks.
Recently, a SEBI Committee conducted a study on 29 companies, which have been or are in the process of being delisted from the BSE, and it came to light that in 14 out of the studied 29 companies, the 52-week average was greater than the 26 weeks average. That is to say, the securities had a much better potential if they would have remained listed on the Exchange and the shareholders would have taken an exit in the ordinary course of trading in the Secondary Market.
In cases like above, the shareholders of such companies although are able to get back the market price of their shares (if it’s a frequently traded scrip), but there is always an apprehension that they could have got a better price if they exited through the Secondary Market.
On the other hand, there is another set of Companies, which are defunct or are not being traded or fall under the infrequently traded category at any of the Exchanges. These Companies, by getting delisted, pay off their shareholders on the basis of certain criterion like return on networth, EPS etc, which may be much lesser than the intrinsic value of the share.
In cases like above, from the shareholders’ point of view, although might be receiving a lesser value than the actual worth, but he stands to benefit in the sense that his blocked funds get released, which now he can utilise in other scrips. Also, he is relieved of the tension of carrying the dead stock on his head.
There is yet another set of companies, that came out with Public Issues, utilised the shareholders’ funds, stopped making compliances with the Exchanges, the Exchanges suspended them, and as per the Guidelines, finally compulsorily delisted them. In fact, there is a long list of such companies which have been delisted by the Stock Exchanges.
From the shareholders’ point of view, this is the gravest situation. Here, the shareholders of the Companies are left in a lurch, without getting any money back for their investments in such companies. Although, as per the Delisting Guidelines, there was a provision for payment of fair value to the public shareholders, but no control mechanism has ever been deployed to keep a check on such payments. But from the Regulators’ (the Exchanges, SEBI etc.) point of view, such delistings are important because this cleans up the system and relieves them of the dead woodstock.
On a comparision of all the above situations, we will realise all the situations have their pros and cons. If a situation is beneficial for one, the other stands to lose. In certain situations, delisting becomes imperative to relieve the system of the unwanted trash companies. Thus, a complete ban on delisting is not possible. A judicious mix of listings and delistings has to be there in the system, to make it run smoothly.
Although the law makers have also kept the same in mind while framing the delisting laws. In the earlier Guidelines of 2003, Cl. 16(1) prescribed the rights of the shareholders in case of compulsory delisting, by being paid a fair value of the shares, but in none of the cases of Compulsory Delisting, has it been tried to check whether the same was paid to the public shareholders or not.
Similarly, under the new Regulations also, Chapter V deals completely with Compulsory Delisting of equity shares by the Exchanges, prescribing therein the procedure as well as the rights of shareholders in a compulsory delisting. Reg. 23, dealing with the rights of shareholders in a compulsory delisting, reads as under:
- Where equity shares of a company are delisted by a recognised stock exchange under this Chapter, the recognised stock exchange shall appoint an independent valuer or valuers who shall determine the fair value of the delisted equity shares.
- The recognised stock exchange shall form a panel of expert valuers from whom the valuer or valuers shall be appointed for purposes of sub-regulation (1).
- The promoter of the company shall acquire delisted equity shares from the public shareholders by paying them the value determined by the valuer, subject to their option of retaining their shares.
Thus, one can very well assimilate that SEBI has all the intents of protecting the interests of the public shareholders, but it is for the respective Stock Exchanges to check the compliance of the same.
Reg. 24 of the Regulations, dealing with the consequences of compulsory delisting, reads as under:
Where a company has been compulsorily delisted under this Chapter, the company, its whole time directors, its promoters and the companies which are promoted by any of them shall not directly or indirectly access the securities market or seek listing for any equity shares for a period of ten years from the date of such delisting.
Although the Regulation prescribes strict consequences for the compulsorily delisted company, its promoters and directors. Nowhere, does it mention the penalties/ consequences in case of defaulting promoters in making the payment of the fixed fair value to the public shareholders.
Thus, while allowing Delistings, more so Compulsory Delistings, the Regulators should be very cautious of the procedures followed, opportunities provided to the public shareholders and its overall impact on the investor confidence as a whole. To sum up, while allowing delistings, a complete check and control mechanism needs to be implemented for the same.