Securities and Exchange Board of India (SEBI) has mandated that all listed companies should have a minimum free float of 25 percent by June 2013. The basic rationale for this move is to improve liquidity in the markets. Increased public shareholding reduces the impact cost (bid-ask spread) and improves liquidity. It also reduces price manipulation as higher proportion of stock gets traded in the market.
In the wake of this revised guideline, companies that have promoter shareholding in excess of 75 percent have two options in their hands to comply with the minimum free float norm. One is to raise capital from the markets which eventually reduces the promoter shareholding. Second, is to offload the promoter stake via block sale. If the companies are unable to do either, they will have to delist for being in violation of the float norms. Apart from the violation oriented delisting, some companies may voluntarily delist themselves. Voluntary delisting candidates are primarily MNCs listed at various global exchanges including India. But their India listing is of no material importance. Hence, they may opt to delist.
No matter what the reason, the delisting proposition presents an exciting opportunity for the shareholders as subject companies offer a lucrative exit price. Thus, the shareholders of such companies can make a fortune overnight. Alfa Laval and UTV Software were prime examples of that.
Here by, we present a list of companies that we feel are probable delisting candidates. However, we have excluded the public sector undertakings from this list as they have a minimum float norm of 10 percent.
|Name of the company||Promoter Shareholding as of latest available date||Rationale|
|Honeywell Automation Ltd||81.2%||Parent Honeywell Inc is a listed behemoth in US.
The Indian unit is a mere geographical presence.
Considering the free-float market cap of just Rs 5.2 bn
it makes sense to delist the Indian unit rather than raise
capital to comply with the norms
|Gillette India Ltd||88.8%||Again the parent is an MNC (P&G).
Free Float of Rs 12.4 bn can turn out to be a peanut for the foreign giant
|Hubtown Ltd (Akruti City)||82.5%|| Leveraged real estate company. Raising capital will tide the liquidity constraints.
But in the current environment would it be possible for the company to raise money?
Free Float cap of just Rs 2.6 bn makes it's a delisting candidate.
|Blue Dart Express Ltd||81.0%|| Outstan ding shares are 23.7 m.
To comply with the norm it will have
to dilute 6% and raise 3.0 bn which appears to be a remote possibility.
|Wheels India Ltd||85.6%||Free float of just Rs 950 m.|
While there are quite a few companies that have high promoter shareholding and might opt for delisting we have highlighted a few relevant ones here which have higher probability to delist. Further, also note that though MNCs like ABB and Siemens do not figure in the list but they could well delist in the future. That's because they got listed in India to comply with certain foreign direct investment (FDI) norms. And now, with those norms getting diluted, the regulatory constraint no longer persists.
Thus, having known the potential delisting candidates should investors really look to invest in them so as to earn a bounty?
Well, not really. That's because delisting involves high amount of speculation. And the stock prices of these companies also tend to reflect the delisting premium to a certain extent. Further, if the entire exercise doesn't conclude as expected stock prices could come crashing down. Thus, we believe it is better to stay away from such speculative bets and invest solely based on fundamentals and valuations.