On May 11 2020, India's largest and world's second largest zinc miner Vedanta Ltd. shocked the investors and announced a proposal to delist the stock from the Indian stock exchanges with promoter group Vedanta Resources making an offer to buy out the 48.94% non-promoter shares at Rs 87.5 per share. They may feel that the market is not doing the firm justice or they may see big value in the business that they don’t want to share with minority shareholders. Anyways!
The stock rallied almost 15% since May 11 and Vedanta ADR rises by more than 25%, the biggest intra-day gain since listing.
But why should a stock soar if it is bidding goodbye to the bourses? Why?
Let's find the answer with these three interrelated questions:
- Why delisting?
- It is good or bad for shareholders?
- What shareholders should do now?
Companies usually opt for delisting when they seek to expand or restructure, are acquired by others, or the promoters want to raise their stake. Delisting a company's share means its permanent removal from the stock exchange platform and no longer be traded on the exchanges. The delisting of shares falls in two categories: voluntary or involuntary. Involuntary delisting happens when a company fails to adhere to regulatory norms, slips below minimum financial parameters or goes bankrupt and the authorities can step in overnight. On the other side voluntary delistings occur when a company decides that it would like to purchase all of its shares while in full compliance with the exchanges.
As per sources, Vedanta has planned to delist because of attractive valuation of stock and a good dividend yield of Hindustan zinc (Its subsidiary).
To voluntarily delist, a company normally offers shareholders a premium to the price at which the shares are being traded on the exchange. The Company informed the exchanges that it would acquire Vedanta at Rs 87.5 per share—(a 3% discount to its last closing price of 90.10 Rs.).
Process: If investors bid in an auction to invest in an IPO, it is only fair that they are allowed to use a similar auction to decide the exit price when a company wants to bid goodbye to them. If companies are allowed to decide on a buyback price on their own, they can shortchange lay investors by undervaluing the business. So we use the Reverse Book Building Process to delist. Reverse book building, through a transparent auction, allows investors to discover the price that is acceptable to them when they are asked to surrender all their ownership rights in a company.
This is not the first time that Anil Agarwal has flirted with the delisting route. In 2018, he successfully managed to delist Vedanta Resources, the parent company of Vedanta Ltd, from the London Stock Exchange.
As on date, public shareholders hold nearly 169.1 crore equity shares of Vedanta aggregating to 48.94% of Vedanta’s paid-up equity share capital. The public shareholding increases to 185.3 crore shares—or 49.86% stake—after including the company’s American depository receipts, which Vedanta Resources would buy for around Rs 16,218 crore.
It is good or bad for shareholders?
First of all let me clear this, 87.5 Rs is just a floor price, not the price you are going to receive from Vedanta by selling your shares. The tender price or the price at which the shareholder is willing to sell his shares needs to be equal or above the floor price notified by the company. The final buy back price will be determined only after the offer closes after aggregating all shareholder bids.
Stock prices generally surges when management decides to delist the company.
If you see closely then it is good for investors as well as for traders. The stock of oil processing company Essar Oil had gained over 30% of its decision to delist.
- Vedanta Resources was taken private on the London Stock Exchange at a 27% premium to the prior close.
- Polaris, the indicative price was 60% above the floor price and the discovered price was 2x the floor price.
Not surprisingly, long-term investors of Vedanta would be hoping for a sweetener in terms of pricing and why not!
If you are a trader, there’s also plenty of moneymaking opportunity in delisting news. Given that delisting is often concluded at an exit price that is above the prevailing market price for a stock, delisting rumours have been known to send some stocks into the stratosphere. I think you got the answer that why Vedanta stock rallied post delisting announcement.
What shareholders should do now?
The answer is ‘Nothing as of now’ because this is just a proposal as of now not the final decision.
The board of directors of Vedanta is scheduled to meet on May 18, 2020 and either approve or reject the delisting proposal. This would require at least two times votes in favor of the delisting proposal. After taking into account various factors, including the due diligence report submitted by the merchant bankers. Next, the company will require approvals of minority, public shareholders, by way of a special resolution adopted through postal ballot.
And even if it becomes a final decision, It is still a long process.
Voluntary delisting doesn't happen suddenly and investors have sufficient time to sell their shares and exit. For instance, the Essar Oil delisting process , first mooted in 2014, took 4 years to conclude amidst regulatory hurdles and opposition from shareholder advisory firms.
So if you are holding Vedanta then wait for May 18, 2020 and if they failed to collect at least two times votes in favor of the delisting, then the offer will be rejected otherwise you will be communicated by Vedanta, What’s Next.
Explained in quick 6 minutes video:
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Research Analyst (SEBI Regd.)
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