From Public To Private: Delisting 101

You’ve heard of the term ‘Inflation’ right? Yeah. Most people have, and most people understand what its implications are. But, have you heard about ‘Deflation’? Sure, maybe you have, maybe you haven’t – but, it’s not as ubiquitous a concept as inflation. You must be thinking – why even are we talking about that here!? Good question! You see, the inflation-deflation thing can be used as an analogy for listing-delistings. In the sense that, most of us know what company listings are (basically, Initial Public Offerings or IPOs), the reason why firms do it and the benefits that entail. But, not a lot of people are aware of ‘delistings’ – why companies delist their shares and go from public to private, what its implications are and a host of other questions around it. This is my attempt to pen down what I have gathered over time after reading case studies, official documents from the stock exchanges + SEBI and some laws governing the process of delisting of shares – all in a way such that it’s easy for you to consume the whole concept of company delistings.

What is Delisting?

I like to call delisting the ‘Contra IPO process’. Simply because it’s essentially the opposite of what an IPO is. When a company goes public, its shares list on the stock exchanges and can be traded (bought and sold) on a daily basis. In contrast to that, when a public company chooses to go private – it has to delist from the stock exchanges – which means that the shares of that company will no longer be available for trading on the platform provided by the stock exchange. 

Delisting can broadly be classified into 2 types – Voluntary delisting and Involuntary delisting. This piece is going to be around the minutiae of voluntary delisting – the what, why and hows around a company going from public to private. However, to maintain the integrity of the holistic approach of this write-up, let’s just quickly get involuntary delisting out of the way, shall we?

Involuntary Delisting

As is intuitive from its name, involuntary delisting or compulsory delisting is when firms don’t really choose to delist from the exchanges. It is, in fact, kind of a penalising measure taken by the regulatory authorities (SEBI, or the Stock Exchange) that bars the company from accessing the capital markets and all things that come with it. This is done mainly because the company has failed to comply with the rules and regulations provided to it as part of the ‘Listing Agreement’, when it became public.

So, for example, companies that trade publicly have to pay listing fees every year to the stock exchange on which it trades. Non-payment of such fees might result in the company getting delisted, involuntarily. Unscrupulous activities by the promoters of the companies, unfair trading practices, bankruptcy etc. are some of the other things that can result in a company being forced to delist from the stock exchanges.

So now that we know why companies delist without its own discretion, what happens if you happen to be a shareholder of such a company? Bad place to be at, no doubt – right? But, thankfully we do have some procedures in place to protect shareholder interests. Essentially what happens is that the stock exchange appoints an independent valuer to determine the fair value of the shares of the company. Once that is done, the promoters of the company are required to buy your shares at that price!

So that’s all about involuntary delisting. To give you context, a famous company that was forced to delist was Kingfisher Airlines, because it went bankrupt.

Voluntary Delisting

Finally, here we are! Lots of unanswered questions around the whole process of delisting have come up, especially because this godforsaken year has seen some big names in the capital markets opting out of the stock market to go into the dark. Vedanta and Adani Power are some of the names that sparked these questions around delisting. So without further ado, let’s dive right in!

Okay look, there are advantages and disadvantages of staying public or going private. Prudent firms tend to chalk out a detailed cost-benefit analysis to come to a strategic conclusion as to whether it makes sense to remain public or go private.

Why does a firm Delist?

The ultimate goal of most young private firms is to IPO one day. The benefits are countless. So why would firms want to give up the status of being a public company? To understand why firms de-list, it’s important to understand why they opt to ‘list’ in the first place. The first time a company goes public, they have to go through the IPO route. It’s basically the way a private company can make its first public sale of stock. 

So, the very first and most cited reason for a company to go public is… money. Companies can raise a lot of funds by going public. And it can use the money for a variety of things – expand operations, introduce new products, invest in Research & Development, pay off their debt… and the list can go on. But there are other, non-material benefits – so to say, that entail as well. The firm’s brand equity is enhanced. People trust it more – since the nitty-gritties of the business are no more in the dark. Going public also enhances the credibility of the company – it becomes easier to convince banks and other lenders to provide loans on better terms (private companies tend to pay a higher rate of interest because of lack of credibility).

All these benefits – then why would a firm even delist unless it’s forced to? Hmm, so the short answer is…

Firms voluntarily choose to delist when the benefits of being a public company (as discussed above) either do not exist, or are overshadowed by the costs of being public. So it just makes economic sense to not be a public company at all.

The long answer is this – you see nobody knows more about the company and its prospects than the people who run it. And in the stock market, it pays to know. If you know everything there is to know about a company, you can put a number to what the fair value of the company might be. And then you can compare that fair value to the actual price that the company is trading at. That will give you an idea as to whether the company is overvalued or undervalued. If you ascertain the fair value of a stock to be ₹100 and it’s trading in the market for ₹50, that means the stock is undervalued and it makes complete sense to buy it! Well of course, it’s not so easy to ascertain the fair value of a stock in the first place. But, if anyone can really come close to determining the fair value, it’s definitely the promoters. 

So imagine that you’re an owner of a mining firm that mines commodities like copper, zinc, iron ore, etc. You own about 51% of the firm and since it’s a public company, the rest of the shares are held by retail investors, HNIs, FIIs, AMCs, etc. Now, for some reason (not so important, but we’ll get to it in a bit), the stock price of your firm has taken a hit and now its trading at really low levels – much lower than it should be after taking into consideration the future prospects of the company. 

Forget for one minute that you are an owner of the company and just think like an investor – if you know with a high degree of certainty that a stock is trading at a price lower than it should, wouldn’t you buy? Yes, you definitely would and most definitely should.

You have that flexibility as a promoter too. Whether it’s ethical or not is a whole different argument, but if you get to buy the rest of your company out for less than what it’s worth, you would/should definitely do it.

Well, Anil Agarwal – the promoter of the metals and commodities mining firm called Vedanta – wants to do the same.

The Vedanta delisting saga

Now for some context as to why Vedanta is trading at low valuations. Global commodity prices were at an all-time high around 2010, and that’s also when Vedanta’s stock price was at all-time highs – obviously – because the end product that Vedanta was selling – metals – were quoting at handsome prices in the global market. And that meant really lucrative margins for Vedanta. Then began the commodity market sell-off amidst the trade-war between China and the US. Their woes were compounded by COVID-19, leading to Vedanta’s stock price almost hitting 10-year lows.

While Vedanta’s shareholders might have suffered due to the steep decline in the stock price, it gave Vedanta’s promoters an opportunity to buy back shares at really cheap prices – especially considering that the commodity market outlook in the future might be positive, as global demand and trade is expected to pick up. That’s why Vedanta and many other firms like to delist from the stock exchange when their stocks have tested low prices amid market overreactions. Obviously, they can’t out-rightly cite this reason – because it is unfair for the shareholders who were hoping to reap the benefits of owning a business with bright future prospects. So firms come up with different reasons. Like Vedanta claims “corporate simplification” as its reason to go private… Um, I don’t quite know what that means, but you can be fairly certain that the reason I gave above might be good enough for it to consider delisting its shares.

Some other reasons to voluntarily delist

Alright, there are a few other reasons for firms to voluntarily delist…

When you have multiple shareholders in a company, it takes longer to make major strategic decisions. What could have been over within a few hours of a meeting, might take days with the board and shareholder approval. Moreover, the company’s long term goals might not always be aligned with the shareholders’ immediate-term goals – for example, dividends. The cash that a company squanders as dividends could otherwise be used to invest in future growth prospects – which will be possible if you are private – because then there’s no pressure to pay out dividends to shareholders.

No, we’re not done yet. Let’s not forget the pressure and cost of dealing with regulatory authorities. Depending upon the size of the company, firms have to pay an annual listing fee to the stock exchange on which it trades. Here’s the NSE and BSE listing fee structure. On top of that, public companies pay for the periodic reports that have to be filed with the regulatory authorities (for example, the quarterly results report, and the annual report). Audit fees, compliance costs, et cetera add up to a lot of money that public firms shed out for these purposes. So yes, being a listed company has its costs, and it should be carefully weighed with the benefits of being listed. It thus makes strategic economic sense to decide to delist your company if the costs outweigh the benefits. That’s what economists like to call a Pareto-optimal solution.

So, in a nutshell, this is what we know thus far…

Saying tata to the bourses: The how

Okay, so here are a bunch of procedures we have to know to understand how a company can go into the dark. It’s a fairly long and tedious procedure from a company’s POV but it’s there to protect the interest of all concerned parties, especially shareholders like you and me.

In order to delist, the one criteria the company absolutely has to meet is that the promoters have to own 90% of the company to be able to take it private. So if promoters own 70% of the company, it has to buy back at least 20% of the shares from the public to go private. That said, before anything, you get the Board of Directors to approve the proposal of delisting. Once done, the firm comes up with a ‘floor price’. This is the minimum price at which the promoters can buy the shares from the public shareholders. If the company trades frequently on the stock exchange, then the floor price is the average stock price in the last 6 months. Remember I had mentioned that it’s often seen that firms tend to delist during or after market crashes? Well, this is the reason – during market selloffs, stock prices tend to be low, and hence the floor price gets pulled down too – which is a good time for the company to lap up shares.

Aight, once the floor price has been decided, a special resolution is passed and the delisting proposal is put to vote – wherein at least 2/3rd (or 67%) of the shareholders have to approve the delisting proposal. That’s hard to achieve, but let’s say it’s done. Now, we reach the reverse book-building stage. Each minority shareholder of the company is supposed to indicate a price – absolutely ANY PRICE – at which they’d like to sell their shares back to the firm. The price at which a maximum number of shares are bid is deemed to be the delisting price – at which the firm has to buy back the shares, or else the shareholders can walk away and the company remains listed.

Wait though, if a minority shareholder does not want to sell at all, they can choose to not bid their shares at all. And that’s fine. But there’s a risk with that. If you don’t indicate a price but other shareholders do, and if the company manages to reach the 90% ownership mark, you will be left with the shares of a private, illiquid company. Um, I mean that’s why people bid in the first place. But if you do find yourself in a situation, don’t worry. You will have time for 1 year after the delisting to sell your shares back to the firm at the delisting price, and the firm HAS TO buy your shares back.

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