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.