Delisting Guidelines : Investors watch out

A guide on investor approach to profit taking from delisting companies:

The Q2 (2^nd Quarter from July to Sept) is going to be termed as the season of “delisting” or “divesting” to the say the least. Not many among the investing community are aware that SEBI had way back in Aug. 2005 issued a dictum ordering listed companies (excluding Public Sector Units) to raise their non promoter shareholding to 25% i.e.: in other words where the promoter holding exceeds 75% for private sector companies, the promoter shareholding has to be brought down to within 75% levels and the time limit specified in the order was 2 years. Now we are almost nearing the expiry of two years by Aug.2007, therefore a lot of frenzied activity should be witnessed on the bourses over the next two months whereby companies falling within the ambit of the SEBI order will figure out ways and means to comply with the provisions contained therein.

There are only two options that such companies can explore namely:

Ø Delisting of securities from the bourses through the reverse book building mechanism

Ø Dilution of stake by offloading a portion of the stake through a follow on public issue or private placement with a PE investor

Lets examine the first option: Delisting of securities from the bourses

The SEBI guidelines for delisting of securities issued in 2003 provide for a minimum delisting price computed on the basis of an average of the 26-week high prices prior to the date of delisting. The company can also explore the reverse book building mechanism (used in buyback of shares) for price discovery and usually such price discovered is always at a steep premium to the prevailing market price. Even if the investor analyses the last 26-week highs of all these companies, he/ she will find that most of them have touched their lifetime highs in the last 6 months only and therefore the exit price will be quite close to their highs to make it attractive for investors to exit the counter.

The second option before the promoter is: Dilution of Promoter’s stake

Where the promoters/parent company want to continue the listing of the company and opt for diluting the stake, they will definitely want to get a better valuation for the shares they are disposing and in case of fundamentally strong companies with a good track record, PE investors and FII’s shall only be too willing to acquire a stake in these entities even if stakeholding comes at a high premium. Especially companies having 90% or more of promoter stake have to offload 15% to non-promoters and this if done to a single investor will also trigger an open offer at a high price to acquire additional shares in the company as per SEBI Guidelines.

A lot of these companies which are prospective delisting candidates have already been witness to hectic buying activity over the last 2 weeks indicating investor interest in the delisting process and the profit potential that’s waiting to be tapped therein. A number of fundamentally strong delisting candidates are trading at 20-30% below their all time highs and can be accumulated over the next one month on broad market declines.

A list of the probable delisting/stake sale counters where prominent activity may be witnessed in the coming days is being complied and will be forwarded shortly. These stocks should be accumulated with a short-term view as the movements in these counters are expected to be news driven and investors should book profits once the upside is noticed in these counters within the next couple of months. The base case assumption here is that SEBI shall not postpone the due date for compliance beyond Aug 2007. Investors in the mean time can visit NSE/BSE websites or other corporate databases to scout for companies that have a promoter shareholding of 75% and above.