New guidelines for public shareholding of listed companies may offer convenient exit route for some companies wanting to avoid public scrutiny
Corporate laws and frameworks are generally supposed to protect consumers and the society, at large, from any wrong doings incurred by a company. However, the newly revised guidelines of public listed companies drafted by the ministry of finance may actually provide an exit route to some of the companies which would prefer to avoid scrutiny and ire of shareholders and general public.
According to the revised guidelines, “all private sector listed corporates must have at least 25% public holding while listed PSUs should maintain a minimum public holding of at least 10%.” The deadline for this compliance is June 2013, roughly 18 months from now. The threshold was 10% in 2001, before being raised to 25% in 2006. However, there were relaxations in the regulations allowing companies to have promoter holding of up to 90% in most cases. This is the first time that the 25% public share holding mandate (and 10% for PSUs) will be strictly enforced by government authorities.
ICICIDirect.com had recently come up with a report naming as many as 18 potential de-listing candidates which may not comply with the new revised guidelines issued by the ministry of finance in August 2010. According to the report, some of these companies are “fundamentally strong multinational companies (MNC) [who] may not have the inclination to increase their public holding and may resort to delisting to have better flexibility in taking business decisions.”
Incidentally, some of the companies in the list had been covered by Moneylife in the past, namely: Oracle Financial Services (OFS), Kennametal India, Honeywell Automation, Fairfield Atlas and Gillette India.
Bigger companies like OFS, owned by US-based Oracle, have the resources to go private and it might opt for this route. According to the report, OFS might have to cough up as much as Rs3,986 crore for buying back its shares. Similarly, Novartis India, Honeywell Auto, Timken India, Thomas Cook and GMM Pfaudler have enough in their coffers to exit the market.
However, we learn from the report that there are some good companies which may not have the requisite funds to pay shareholders at time of delisting. For instance, 3M India, part of the well-known 3M and inventors of Post-It Notes, has only Rs267 crore on its balance sheet, whereas it would have to shell out Rs1,000 crore at time of delisting, assuming its market price is same as today. Similarly, local companies Blue Dart, AstraZeneca India, Swedish-based Alfa Laval India, Gillette India, Wendt India, Singer India and Kennametal India are examples of companies which, currently do not have the resources to exit and might have to borrow funds for this purpose. Further, Gillette India was cited as a ‘value destroyer’ in our 17 January 2008 issue of Moneylife.
We had covered Kennametal India in its reputed Street Beat section as part of the 26 January 2012 issue. The Moneylife team valued the company at Rs450, which is well below its current price of Rs789 (as on 13 January 2012). Hence, there’s a possibility investors will get a good deal in case the company decides to delist, if the price of the scrip doesn’t fall.
The report cites, “The chances of a delisting offer succeeding also appears higher due to a moderation in return expected by the public shareholders and the enhanced willingness to exit the stock even at a marginal premium to current stock prices.” Thus, some of the companies might want to take advantage of the new rules by exiting the markets, to focus on running their business, thus avoiding public scrutiny, endless compliance requirements and accountability.
The critical question to ask at time of delisting is whether a particular company offering a buyback is offering a “fair price” to the shareholders. According to the ICICIDirect.com report, “The case for delisting becomes stronger in the current weak trend prevailing in the equity markets, which has led to a substantial fall in stock prices providing an opportunity for such corporates to buy out the remaining stake with the public at lower valuations.” This may not be good news for investors who have bought shares in these companies at higher valuations during the market peak. Companies which have delivered poor returns for shareholders will obviously want to exit the market, further depriving of shareholders of any chance of getting back their capital.
It is not very good news to some companies either, as some of them, especially good ones, would be under pressure to offer securities to comply with the new requirements without having any regard to market conditions, which may in turn impact valuations that might prove to be harmful to shareholders.
Either way, we find that the new regulations do not provide an ideal situation for shareholders. Good companies do not generally delist as they usually make an effort to comply with regulations. The new regulations are merely giving a window of opportunity to companies who prefer not to be accountable to the public at large, and ultimately its shareholders.
A brief consolidation is likely in the coming week which will set the tone for a rise during the end of the settlement or more likely till the end of the month.
S&P Nifty close: 4866.00
1. The bulls have broken the shackles and the bears will find it difficult to pull things back immediately.
2. We saw the Nifty hit 4,815 as well as 4,882 points (50% and 61.8% retracement levels of the fall from 5,099-4,531 points) last week.
3. This corrective rise shows strength and could move up to 4,965 and 5,068 points (50 and 61.8% retracement levels of the fall from 5,399-4,531 points) in the weeks ahead.
4. This seems to be the best chance for the bulls to capitalize on the gains of the last two weeks and push prices higher during the end of this month, albeit after a brief pause.
As mentioned in the last week’s piece we expected a small top on the 13th which seems to have taken place, but no significant downsides seems likely unless key supports are broken swiftly. A brief consolidation is likely in the coming week which will set the tone for a rise during the end of the settlement or more likely till the end of the month. If things play out as expected then one should look for exit opportunities at the end of the current F&O settlement or ideally the beginning of the next one.
(Vidur Pendharkar works as a consultant technical analyst & chief strategist, www.trend4casting.com)
The downgrades—announced after US markets closed on Friday—are likely to be a dampener for financial markets as investors are likely to sell euro, Eurozone equities and sovereign bonds
New York: Rating agency Standard and Poor’s (S&P) has lowered the sovereign ratings of nine Eurozone countries, including France and Italy, a move that reignited concerns over the fiscal sustainability of the region, reports PTI.
S&P has lowered the sovereign ratings on nine Eurozone countries, of which the long-term ratings on Cyprus, Italy, Portugal, and Spain were lowered by two notches.
The sovereign ratings on Austria, France, Malta, Slovakia, and Slovenia, were lowered by one notch.
France’s sovereign rating has been downgraded to AA+ the level of US long-term debt, which S&P downgraded in August last year.
Germany was the only country that retained its coveted AAA tag—the highest investment grade ratings.
“Today’s rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the Eurozone,” S&P said in a statement.
Sovereign rating is an indicator of country's credit worthiness.
Meanwhile, French finance minister Francois Baroin has reportedly told France-2 Television, that the downgrade of France’s AAA sovereign debt rating was not “a catastrophe.”
He reiterated that France still had a solid rating.
“The US, the world’s largest economy, was downgraded over the summer,” Mr Baroin said. “You have to be relative; you have keep your cool. It’s necessary not to frighten the French people about it.”
European economic affairs commissioner Olli Rehn also criticised S&P’s decision to downgrade nine Eurozone nations as ‘inconsistent’.
The downgrades—announced after US markets closed on Friday—are likely to be a dampener for financial markets as investors are likely to sell euro, Eurozone equities and sovereign bonds.
Meanwhile, earlier Friday, the euro had hit its lowest level in more than a year and stock markets in Europe and the US fell.
S&P said the ‘stresses’ in the Eurozone include: tightening credit conditions; an increase in risk premiums for a widening group of Eurozone issuers; a simultaneous attempt to deliver by governments and households; weakening economic growth prospects; and an open and prolonged dispute among European policymakers over the proper approach to address challenges.
The outlooks on all ratings but for two of the 16 Eurozone sovereigns are negative, indicating that there is at least a one-in-three chance that the rating will be lowered in 2012 or 2013, S&P added.
“The outcomes from the EU summit on 9th December 2011, and subsequent statements from policymakers, lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the Eurozone’s financial problems,” S&P said.
The EU summit mulled ways to bolster the sagging economic conditions in the euro area—a grouping of 17 countries that share the euro currency.
Meanwhile, S&P has affirmed the long-term ratings on Belgium, Estonia, Finland, Germany, Ireland, Luxembourg, and the Netherlands and the outlooks on the long-term ratings on Germany and Slovakia are stable.
In December last year S&P had warned that 15 European nations were at risk for a possible downgrade, citing increased systemic risk in the region.
Tightening credit conditions, disagreements among European policy makers, high levels of government and household indebtedness, were some of the reasons cited by S&P for keeping sovereign ratings on watch in December 2011.
Earlier in August 2011, S&P had downgraded the US government’s ‘AAA’ sovereign credit rating.
The downgrade, S&P said, reflected its opinion that the fiscal consolidation plan which Congress and the administration recently agreed to “falls short of what, in our view, would be necessary to stabilise the government’s medium-term debt dynamics.”