To the avid advocate of shareholder democracy and equity cult, both delisting and buyback are an anathema. But which one is a greater evil assuming both are evils? In India as elsewhere, the liberal view that has come to prevail is that listing and delisting are two sides of the same coin if there should be no entry barrier, there shouldnt be any on exit either.
It seems greater importance seems to have been given to corporate freedom rather than to shareholders un-stated but inherent right to stay put in a company and savour the long-term rewards of such association. Be that as it may. When juxtaposed against buyback, delisting comes out smelling of roses because the promoter often spearheads it, forks out the requisite funds from his resources and the capital of the company is not extinguished (which cannot be done because buyback cannot be for treasury operations in our country) thus protecting creditors interests as well.
In buyback, it is the company that forks out the funds often for the benefit of the incumbent promoter (as the Indian experience shows) so as to increase his comfort level a 20 per cent stake leapfrogs to 25 per cent on a 20 per cent buyback instead of for the altruistic benefit of all shareholders. But then, on the flip side, delisting has an element of coercion given the fact that a shareholder who holds out may well find no exit route and willy-nilly allows himself to be eased out whereas whether to accept the buyback offer is entirely optional for a shareholder. Yet, what projects delisting as a lesser evil is the fact that the capital of the company stays intact adding to the comfort level of the creditors and the fact that the promoter takes up his stakes in the company transparently as in a creeping acquisition using his own funds.
The world over the protracted debate has been not on whether delisting must be permitted but on what terms. Unfortunately, reverse book-building is now sought to be jettisoned in favour of return to SEBIs perceived panacea for all seasons and reasons six months average of daily highs and lows or the last two weeks average, whichever is higher, or the value derived by a rating agency plus 25 per cent mark-up, whichever is higher.
It is amazing that SEBI has heeded the plea of the corporate sector especially the multinationals that seek delisting once their purpose of listing is served that the reverse book-building results in too high a price discovered that results in the company giving up the idea and retaining its listed status.
There are two things to be noted here. First, SEBI has never lost sleep over the high price discovered on book-building in the run up to an IPO. The point is the regulator which finds nothing wrong with book-building should have nothing against reverse book-building either. Incidentally, the rating agency valuation plus 25 per cent alternative formula which was not there in SEBIs original formula under the takeover regulations is a throwback to the days of Controller of Capital Issues besides being of a piece in its ad hocism and irrationality with the regulators giveaway to the person taking over to explain away as much as 25 per cent of the takeover price as being towards non-compete agreement s igned by the promoter who sold away his holdings in a negotiated deal.
Second, how does it matter to SEBI if the frustrated company stays put in the bourses?
S. Murlidharan (The author is a Delhi-based chartered accountant.)