A number of multinational firms whose Indian susbsidiaries are listed on the local stock exchanges are in the process of delisting. This is the second round of such delisting trend which was observed around 8-10 years ago when the markets had tanked and numerous MNCs found an opportunity to exit from the Indian bourse. But the rise in the stock market could make such delisting offers unsuccessful.

The firms who have over the last few months announced delisting offers or buyback offers which would ultimately lead to delisting include names like South Korean confectionery maker Lotte India, drug maker Novartis, Mylan owned Matrix Labs.

US generics drugmaker Mylan is the latest to offer to buy back 24.8% of Matrix Laboratories at an indicative price of Rs 150 which is the same level at which it is trading currently at the stock exchange. Matrix Labs scrip has moved up 30% since the time Mylan first indicated that it is coming up with a delisting offer. On the day Matrix Labs informed the stock exchange about the offer from Mylan to buyout the minority shareholders, the stock opened 20% up compared to the previous days closing and has moved up further 8% to Rs 152 as against the indicative offer price of Rs 150/share. Mylan holds 71.2% in Matrix and Indian founder of the firm N Prasad hold around 5% in the company.

Korean FMCG firm Lotte came up with a revised offer last month. It had last year rejected the price of Rs 825 determined by the reverse book building process(through which such delisting is to be implemented) as it considered it too high. The new ‘indicative’ offer price is pegged at Rs 370/share. Given that the ruling price is Rs 504 this offer is unlikely to muster any share either.

The latest trend began sometime in 2007 when the markets were still up and has only gathered steam since then. Some of the MNC arms which got delisted over the last 1-2 years include Bosch Chassis Systems, GE Capital Transport, Panasonic AVC, Wartsila and Ray Ban.

Now many others are trying to take that route to get rid of stringent listing norms which require numerous disclosures. MNCs had listed their Indian arms due to a government policy which required them to dilute a part of holding to local investors. Overtime the quantum of equity to be owned by local investors were relaxed and eventually as the economy opened up many MNCs started buying out the investors in these companies.

Stringent Listing Norms; Disclosures Not Go Down Well With MNC's 

While the exit of MNCs from the bourses faced some criticism, they had a strong argument against listed. The key reason for someone going public is to raise funds but given their parents backing they didn’t require to raise funds in India. In addition the listing requirements added to costs and also required country specific disclosures which MNCs are not very comfortable with. Given a chance they would like to have just one firm which is the parent firm to be listed in the home market.

As a result a number of MNCs such as Philips, Cadbury, Otis, Carrier, Reckitt Benckiser to name a few delisted themselves around a decade back. That was also the time when the market was at a low and the MNCs found ready takers to sell out shares.

When the market was in a bull run such delisting offers almost dried up and barring a few exceptions there were not many delisting offers. This was because of two reasons-- rising cost of buying out the shares and less probability of successful open offer as many investors tend to expect the share price to go up and look for a significant premium to the ruling stock price.

Infact some investors (largely punters) usually do not participate in open offers expecting the MNC to keep raising offer price. As a result in many companies --even those who have got delisted-- have some public shareholders who refuse to sell out and ask for ever higher premium to tender their shares.

Over the last one year some MNCs have found an innovative way to get round the problem of unsuccessful buyout offers. They were also helped by the market crash which forced many punters to look at selling out at a reasonable price.

As per the strategy, first used by Bosch Chassis Systems and GE Capital Transport, MNCs started disclosing the maximum ‘acceptable’ price for delisting. Although, some firms in the past have given an indicative price for delisting higher than the floor price these two were probably the first where they have given the maximum acceptable price. While the shareholders are still free to ask for a higher price, in these cases, the maximum acceptable price disclosed by the acquirers has become the final discovered price by default.

Delisting Norms

The delisting norms require acquirers to follow a price discovery mechanism through the reverse book building route. As per this all minority shareholders tender their shares asking for a price without any ceiling. The acquirers discloses the ‘floor’ price which is determined as the average of the preceding 26 weeks traded price quoted on the stock exchange where the equity shares are most frequently traded. The price at which the maximum number of shares are tendered becomes the exit or discovered price for delisting. It is upto the acquirers to accept or reject this discovered price. If they reject the price than the company stays listed.

In both Bosch Chassis and GE Capital Transport, the maximum acceptable price disclosed by the acquirers eventually became the final discovered price. It is argued that minority investors figure out that the premium that they are going to get over the existing market price may not be available if the acquirer rejects a price which is above its ‘acceptable’ price. As a result most shareholders tender their shares at that price even as they are free to ask for a higher price.

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