Saturday, February 9, 2013

Dealing with Delisting: MNCs’ New Dilemma

A large number of MNCs might choose the delisting mode as they do not like to interfere their decision-making process. But there is myriad of scope and enough incentives lie ahead for MNCs in the country, says B&E

It reminds us of 1973, when finance minister Pranab Mukherjee proposed, in his budget speech for FY 2010-11 — to make it mandatory for all companies listed on Indian bourses to have a minimum of 25% public shareholding. For those who know it, it was like revisiting the days of 1973, when government had made it mandatory for all foreign companies operating in India to have local listing. And the result was that many big MNCs, including Coca-Cola and IBM, preferred to pack their bags and move out. And now as the Centre has revised the guidelines and set the mandatory requirement, taking a cue from history, the question that is haunting the Indian market is that: How will the MNCs react to the situation? Will they prefer to delist themselves rather diluting the parent company’s stock, or go the other way?

A report released by SMC Capital, states: “There are 22 MNC firms listed in India, whose public shareholding is less than 25%. Considering the nature of the MNCs, their foreign parent companies may not be willing to offload their stakes.” In such a case, they may choose delisting route and we might see mass exodus of MNCs from the Indian capital markets. However, it’s not SMC Capital, rather most of the players in the market have a strong feeling for the same. And this ‘faith’ is currently being reflected on the share prices of MNCs, which have a bigger promoters’ holding (as the chances are high that these companies would opt for de-listing). For example, on June 7, 2010, (the announcement came on June 4, 2010) while the BSE Sensex tanked nearly 2% on global clues, the stock price of Ineos ABS (with public holding of 17%) rallied over 14% to close at Rs. 338 a share. The scrip of Fairfield Atlas (public holding is about 16%) rallied 14% to close at Rs 55. As per trading data for 20 MNC stocks available on the BSE, 18 rallied on the particular day owing to delisting speculations.

Another theory that supports the fact that a large number of MNCs would prefer to delist themselves, as MNCs in general, do not like to have an interference in their decision-making process. Maybe it’s one of the reasons of their exodus. Since 2003, more MNCs (Hewlett Packard, Electrolux, Deutsche Home, Yokogawa India, Rayban Sun Optic, GE Cap, Bosch Chassis are few of the big names who fall in the category) are either delisting themselves from Indian bourses or increasing parent company’s stake to unparallel heights. Pharmaceutical major Novartis can be a major example for the same. In March 2009, the Switzerland-based parent company of Novartis India announced its plans to raise its stake in the Indian subsidiary from 50.9% to 89.9% by acquiring shares from the public shareholders. The comapny even offered a very lucrative price of Rs. 351 per share, which was at a 27% premium. And the reason, as disclosed by the company, was that the parent company wanted to consolidate its holding for higher “flexibility to organise its commercial and financial activities” in the country. However, Hatim Broachwala, Equity Analyst, Khandawala Securities, says, the new 25% minimum public holding condition “will lay foundation for good corporate governance and help in curbing of stock price manipulation, which means these companies would face a certain difficulty in their so-called ‘flexibility in activities.” And this may motivate them to delist rather than dilute.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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