Vedanta Delisting Offer Fails: What We Know So Far?

In a move that surprised market pundits, mining baron Anil Agarwal in May announced a proposal to buy out 49% stake held by minority and other non-promoter shareholders in Vedanta Ltd.

What is de-listing of shares and how do shares get de-listed?

De-listing of shares is the process by which a company removes its equity shares from the stock exchange. De-listing takes away a company’s right to participate in the secondary market, which is mainly exercised in the form of trading of shares among investors. 

The process of de-listing is symmetrically opposite to that of an Initial Public Offering (IPO). The process is de-listing is carried out under the oversight of the market regulator, i.e. Securities Exchange Board of India (SEBI), and within the guidelines issued by SEBI.

De-listing is done through the process of reverse book building. To understand the process, we should first gain perspective on the forms of de-listing. De-listing is of two types:

1. Voluntary de-listing: The company willingly decides to de-list the equity shares from the stock market. The reasons for voluntary de-listing may range from a simplification of organizational structure, merger, and acquisition to operational issues within the company
2. Involuntary de-listing: The company is directed by the market regulator to take down the listed shares from the market. The reasons for forced de-listing may range from non-compliance to regulatory norms and violation of SEBI guidelines to unreasonably low share price and liquidation of the company.

What happens when the shares are de-listed?

The fate of the stock of a company is associated with the type of de-listing. In the case of an involuntary de-listing, an independent valuer decides the price at which the shares will be de-listed. The promoters are required to buy the company stock from the market at the decided price. Involuntary de-listing leaves little to no scope for prospects of the company stock. Therefore, the involuntary de-listing process is straightforward in that investors tender their shares to reap little value from what remains.

However, in the case of voluntary delisting, the investor has two options:

1. Participate in the Reverse Book Building (RBB) process, which enables an investor to offload the company stock at the discovered price
2. Sell the stock in the Over the Counter (OTC) market, if the investor missed the opportunity to tender shares in the RBB process as well as the exit window. Certainly, the investor will have to face liquidity issues due to the unavailability of buyers.

What is the Reverse Book Building?

Reverse Book Building is a comprehensive mechanism to achieve price discovery by capturing sell orders. At the start of the process, a floor price or the minimum price at which the shares will be bought back by the promoter is specified. The shareholders that are willing to offload their shares express the desirable price, which may be equal to or more than the floor price. The final price is announced is based on all the offers for the existing shares.

As per SEBI guidelines, the reverse book building process for voluntary de-listing entails the following: 

• The acquirer or the promoter is required to assign a merchant bank as the Book Running Lead Manager (BRLM) that oversees offers from shareholders
• BRLMs and promoters are required to make a public announcement and dispatch an offer letter to shareholders along with a bidding form
• Sell orders can only be placed through designated trading members. Approved trading members by NSE are ICICI Brokerage Services, Karvy Stock Broking, and Master Capital Services
• The shares have to be offered to trading members before the order for shares is placed. Alternatively, a security deposit in place of the shares is also acceptable while placing the order
• The final price of the de-listing process is the price at which the maximum number of shares has been offered. The promoter retains the option to accept or reject the final price.
• Post-announcement acceptance status of the promoter and final price by the BRLM, shareholders are allowed to tender shares at the final price. The shareholders that fail to participate in the RBB process are still eligible to tender their shares. The promoter has to buy the shares at the final price if the sale is within the exit window, which is typically set for one year.

Small companies do not necessarily have to follow the reverse book building process and may exercise special provisions listed in the guidelines. 

Can a de-listed stock get re-listed?

If a stock was de-listed voluntarily, the company has to wait for a period of five years to get the stock re-listed.

If a company underwent compulsory de-listing, the company promoters, full-time directors, and group firms are de-barred from the stock market for a period of ten years.

There are no widely known benefits of de-listing. The idea of capital markets is to aid a smoother flow of capital. When a company has exposure to capital markets, the company has the privilege to achieve the expansionary potential of its business operations. However, companies de-listing from the securities market find solace in the regulatory freedom gained. Companies not listed on stock exchanges are free from tight regulatory norms that are applicable to listed companies. Therefore, the companies can reorganize capital and not be answerable to shareholders at the same time. Some companies confuse this incidence with operational flexibility and label it as a benefit of de-listing. 

Development of Vedanta delisting

As Vedanta Limited stepped closer to delist its shares from Indian bourses, the board, on Saturday, announced that its delisting offer is deemed to have failed as per the terms of delisting regulations notified by SEBI. With the group’s announcement of failure in the delisting of shares, it will have to return all the shares that were previously accepted, in the next 10 business days.

As per news reports, there were bids of up to Rs 1 lakh per equity share of Vedanta Ltd. A bid of more than 24 lakh shares was offered to delist at a price of Rs 5,555 per share. These bids were considered to be highly irrational as Vedanta had set a floor price of Rs 87.25 to delist its shares.

Life Insurance Corporation (LIC) of India which holds more than 6.3% stake in Vedanta Ltd, is seeking Rs 320 per share for its 23 crore shares which translate to a premium of 267% above the floor price of Rs 87.25. For the reverse book-building process, LIC’s bid of Rs 320 became the discovery price and if the promoters would have accepted the offer of India’s largest insurer, every shareholder would’ve received Rs 320 per equity share of Vedanta Ltd.

For the purpose of delisting, the promoters had earlier raised a total sum of US$ 3.15 billion (24,000 crores) intending to support a price of Rs 140-145 per share. However, the BSE website on Friday showed that maximum bids were received for Rs 320 per share for which the group will need 42,800 crores to fund the delisting. 

Vedanta going Private: Why is Vedanta delisting?

The reasons behind delisting are pretty obvious as there are many benefits to take a company private rather than keeping it public.

1. Perfect time for the promoters to buy-back the shares as they are trading at cheap valuations and have plunged more than 50 percent in the last few financial years
2. The firm says that corporate simplification is the main trigger behind its delisting plans. In the last few years, the Vedanta group has made some structural changes which are in sync with its philosophy of corporate simplification

The merger of Sesa Goa and Sterlite to form Sesa-Sterlite (later renamed as Vedanta Limited) in 2012, the merger of Vedanta Limited and Cairn India in 2016, and the delisting of parent company Vedanta Resources Ltd. (VRL) from the London Stock Exchange (LSE) in 2018.

Apart from the above-mentioned reasons, when a company goes private, it gets away with the scrutiny by the regulator (SEBI and SEC) and comparatively makes lesser disclosures.

Why did the Vedanta delisting offer fail?

The public shareholders made a valid tender offer for 125.47 crore shares which is almost 8.5 crores less than the minimum requirement of 134.1 crore shares that are required to be accepted to successfully delist the firm.

As per news reports which went unconfirmed, bids for more than 12 crore shares most of which were placed in the extended deadline after market hours due to an overload on the system (between 3:30-7:30 PM), are being scrutinized for error entries.

The SEBI did not grant any extension in response to the request by the promoters of the firm and bankers to this offer for an extension to complete this process.

Fully Paid-up Equity Shares of Vedanta Ltd.	90% of the fully paid-up shares	Shares with promoters	Additional requirement of shares	Shares with public	Total confirmed public shares bid
356,10,08,835	320,49,07,951	186,36,18,788	134,12,89,163	169,73,90,047	125,47,16,610

The road ahead for Vedanta Ltd

For now, the promoters will have to return all the shares tendered by public shareholders in the delisting offer and the shares will continue to remain listed on Indian bourses and the American Depository Receipts (ADRs) will remain listed on New York Stock Exchange (NYSE).

As per the norms, promoters of the company will have to publicly declare by making a clear announcement whether the delisting offer was a success or failure within the five day period granted (5 days from the closing of the bid period),i.e., before 16th October.

Further, the company will have to function as per its dividend distribution policy. SEBI guidelines make it mandatory for top 500 companies to declare a dividend distribution policy (DDP). Vedanta’s dividend distribution policy states that the dividend received by the company from Hindustan Zinc will be transferred in entirety to investors of Vedanta Ltd. The promoters who chose to note pass dividends received from Hindustan Zinc earlier will be now required to credit the entire amount into the accounts of shareholders.

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