Delisting nightmare haunts MNCs, most may have to use accumulated profit of 10 years

Delisting shares from Indian bourses could cost multinational companies, or MNCs, dear, as some of them may have to shell out more than 10 years of their accumulated net profits to delist their Indian entities.

The global parents of some of the Indian entities may find the fund set aside for delisting inadequate as their share prices soar on hopes of delisting, making it unviable for some firms to delist, said industry experts. As per regulations, the global parents will have to reduce promoter stake to below 75% if they fail to delist their Indian units before June 3, 2013.

"Most of these delisting candidates have surged once again, trading at exorbitant valuations. This may make delisting expensive even for MNCs with deep pockets," said Chokkalingam G, executive director & chief investment officer at Centrum Wealth Managers.

For instance, if the global promoter of Blue Dart Express decides to delist the stock, they will need to shell out nearlyRs856 crore based on Monday's closing price. The amount is huge when compared with its cumulative net profit of Rs610 crore in the past 10 years.

Oracle Financial Services, whose accumulated 10 years' net profit stood at Rs4,344 crore, will have to shell out an almost equivalent amount to delist at current market prices. "A failed delisting offer may impact the shareholders," said Akil Hirani, managing partner, Majmudar & Co. Afailure to delist can result in the stock price of the company coming down in the same manner as it could have caused it to rise in case of a successful delisting, he said.

Experts said several foreign companies are being prompted to delist due to increasing compliance requirements and rising investor activism, which are interferring with their day-to-day operations. "Most of them also want to delist to stay away from the huge market glare as we are seeing lot of investor activism picking up," said Chokkalingam.

He said the control over huge reserves that these listed Indian subsidiaries command may also be attracting some promoters. However, as most of these companies have not formally initiated delisting, once reverse book-building starts, the final price could be at a significant premium to the prices at which these companies are trading at present.

For instance, in case of Alfa Laval , while the parent gave a floor price ofRs2,045 and also indicated a price of Rs2,850, the price that was determined based on the reverse book-building stood at around Rs3,850, as per BSE, which is almost 35% higher than the company expected

The Swedish company will have to pay around Rs785 crore to delist the shares, which is equivalent to its past 10 years' net profit of Rs753 crore. Industry experts feel that the prolonged run-up in share prices is leading to some kind of bubble.

"Expectations have gone up after Atlas Copco's delisting. After the huge price discovery of Alfa Laval, stock prices of most of the delisting candidates have started surging in anticipation that promoters will be willing to delist at any price," said Vishal Jajoo, senior analyst at Nirmal Bang Securities .

Despite the market fall, these delisting candidates continue to trade firm and in many cases continue to rise, resulting in the risk-reward ratio turning against the minority shareholders.

"Beyond a certain price, many promoters will start looking at alternative methods to meet the compliance," said Jajoo. "Only the delisting story without any exemplary financial performance  may not keep the stock price buoyant, beyond an extent," he added.


Source : ET