Delisting Vedanta (Almost!)

In our last article we discussed an alternate way for a company to go public. This time, in the process of writing this, we try to understand with you what is happening around Vedanta trying to de-list from the stock market.

While all of us have a fair understanding of why IPOs happen, there’s a strange look to reversing an IPO, de-listing as we know of it. This essentially means that a company can no longer trade with public individual shareholders. De-listing can be a result of a strategic decision at the company promoters’ end, or a penalizing decision at the regulators’ end like SEBI. Succinctly put, companies going bankrupt or indulging in wrongdoings such as non-payment of fee dues towards regulators or corporate misconduct are delisted. However, here we will talk further about delisting done voluntarily.

While IPOs are vehicles to raise money, de-listing, as a mirror opposite of IPO, means a company would have to buy back its own shares from investors, shareholders and will further operate as a private company.

Few big names to have initiated a delisting process recently are Vedanta and Adani Power. At this point, it is imperative that we get a brief understanding of the reasons and process of delisting.

A company can decide to de-list because of:

• Undervalued Shares - If the share price of the company suffers a drastic hit, as we have seen due to circumstances like Covid-19, a company, specifically one, loaded with disposable cash would be willing to buy back its ownership at a cheap price. However, due to the shady ring and a debatable discussion of ethical business practices that this practice comes with, this reason although pre-dominant, is never really stated officially. During a delisting, shareholders who have invested sums of money at higher prices potentially bear high losses and announcing this reason is basically saying that the company doesn’t care about them.

• Formality Costs - This generally includes costs like fees charged by regulators, compliance costs and conducting expensive audit and reporting for a large volume of shareholders.

• Slower decision making - Higher the number of board members, directors, higher the number of opinions. This is bound to slow things down when it comes to making decisions.

Once a company arrives at a decision to de-list:

1. The board has to approve of the decision.

2. The company decides a floor price, which is the minimum price which it is willing to pay for each share.

3. 2/3rds of the shareholders have to approve the decision to de-list.

4. Shareholders open their holdings up for bids at prices they deem justifiable. If the company and the shareholders do not reach a consensus, delisting of the company stays.

5. In the case a price decision has been reached, the promoter has to become the eventual owner of at least 90% of the shares.

Vedanta is an Oil & Gas and Mining organization operating for over 40 years. However, with the events in the last one year unfolding, Vedanta’s share price hit its lowest. This opened up an opportunity for the company to gain back ownership of its company at a cheap price. What could be a better time to shore up shares for the promoters than now.

Source: Business Insider. Vedanta Shares lost almost a third of their value in a span of 3 months.

However, according to them, de-listing is their attempt to streamline some of their financial operations, or ‘corporate simplification’ in other words.

Vedanta announced a floor price of ~Rs.87 per share. The promoters need to buy back almost 134Cr outstanding shares to accumulate a 90% holding in the organization and eventually de-list from the market. Among these holdings, ~18% shares are held by foreign portfolio investors, ~9% are under mutual funds and ~6% shares owned by Life Insurance Corporation. The volume of these investments have given these entities enough power to control if Vedanta is able to de-list.

Against the floor price that Vedanta had set, the majority of the bids were priced at Rs.150-160 per share. But, LIC offered a bid to take Rs.320 per share. 3.6 times of what Vedanta was offering. Additionally, of the total shares that were tendered, to continue with delisting, it was inevitable for Vedanta to accept LIC’s bid. Subsequently, the attempt at de-listing failed and Vedanta continues to be a publicly traded company and as we write this piece, is trading at ~Rs.95 per share.

Since, to complete it’s 90% lap-up, Vedanta had to mandatorily buy LIC’s holdings, the discovered price, or exit price in this case was Rs.320.

Discovered price is essentially, the lowest price bid the company would have to accept in order to go through the delisting process.

However, the high discovered price does not seem to be the only reason for the failure. There seems to be an element of unlawfulness too that has not been clarified yet. ~137Cr shares were tended by shareholders, making a comfortable margin above the required 134Cr. However, until the closing time of bid, only ~125Cr shares had been confirmed, leaving close to 12Cr of them unconfirmed. This led to Vedanta not reaching the required mark and eventually losing the delisting.

What seems to be further strange is that there were 42 lakh shares that were tendered for around Rs.90. This was even lower than the price at which the share was trading at during the bidding time frame.

For the unexpected non-confirmation of subscribed shares in such volume, SEBI shall be further investigating to understand if there is any ploy behind such an activity, and if there is one, what could possibly be the motive behind the same.

Vedanta has around 2Bn USD worth of loans maturing in the upcoming one year. Through the privatization effort, promoters would have gained greater control over the profits and eventually would have helped them clear the debt. However, those plans as we discussed above have been derailed entirely adding to the debt strain of the company.

Hexaware Technologies has been the only company in the recent past to have successfully delisted from the stock market whereas, delisting procedures for Adani Power and All Cargo Logistics are still in the pipeline.

Some of the other delistings that have happened over the years.

Successful delisting of Vedanta would have resulted in an inflow of ~3Bn USD liquid money into the Indian economy which cannot be ignored. However, had the delisting process completed, the ultimate loss-making entity here would have been individual shareholders who would have to give into selling undervalued shares with future growth prospects. Hopefully, now they are likely to become beneficiaries of an upcycle that the commodity market might see with production levels going back up.