Last week in an exchange filing, Vedanta Resources stated that the delisting offer for its Indian subsidiary, Vedanta Ltd. had failed as the company could not garner the required number of shares.
In this article, let’s take a detailed look at what it means for the shareholders.
In May 2020, the promoters of Vedanta had announced a delisting offer through a process of reverse book-building. Later in June, 93.3% of all shareholders and 84.3% of public shareholders approved the proposal to delist the shares of Vedanta in a special resolution by postal ballot. The floor price for share tendering was set at Rs 87.25.
The reverse book building process for public shareholders to tender their shares began on October 5 and concluded on October 9.
Why the promoters of Vedanta decided to delist the company?
The intended delisting of Vedanta Ltd was aimed at providing the group with enhanced operational and financial flexibility as well as support an accelerated debt reduction programme in the medium term. Vedanta has nearly $7 billion in debt out of which around $1.9 billion is maturing in the next 12-15 months. Vedanta is only operating entity for the company, which is dependent on the subsidiary's dividends to fund interest obligations.
Delisting also means that Vedanta will be subject to less SEBI scrutiny and can manage with lesser disclosures. Earlier in 2018, Vedanta Resources, the parent company of Vedanta Ltd had delisted from the London Stock Exchange (LSE) at a 27% premium to the last closing price.
What is the delisting process through reverse book building?
Reverse book building refers to a process by which a company which intends to delist from the exchanges, decides on the price that needs to be paid to public shareholders to buy back shares. The company has to follow a detailed regulatory process for delisting with the first step being the appointment of a merchant banker to oversee the electronic bidding process.
The company then advertises the offer with a letter detailing the floor price for the buyback to all public shareholders. The reverse book building process through an online, fully automated, screen-based bidding system is then facilitated by the stock exchanges. Shareholders holding shares of the company can then approach their stock brokers to convey their bids to the company.
The tender price at which the shareholder is willing to sell his shares needs to be equal or above the floor price set by the company. The final buy back price will be determined only after the offer closes after aggregating all shareholder bids. Once the price is finalised, all offers below or equal to this final buy back price will be accepted.
The delisting offer is termed successful only if a minimum quantity of shares, as defined by the Delisting Regulations, are tendered by shareholders and accepted by the company.
What went wrong with the delisting of Vedanta?
Vedanta announced that it was not able to garner offers for the 134 crore shares required for the delisting process to go through. It was only able to gather around 125 crore shares instead.
A significant reason why the delisting of Vedanta failed is the considerable price difference between the price offered by the company and the price offered by shareholders and institutional investors.
According to media reports, while some investors had offered their stakes at around Rs 170, many investors, including institutional investor, LIC which holds 6.37% stake in Vedanta, had offered shares for Rs 320. As a result, Vedanta would have been required to pay almost double per share than what they had anticipated for a significant proportion of shares.
The road ahead for Vedanta’s shareholders
In a filing made by Vedanta, the company said that the promoters will not acquire any shares tendered by the public shareholders under the delisting offer and all the shares tendered will be returned to the respective public shareholders.
As of now, the verdict is out. Shareholders have rejected the delisting price offered by the company considering it as a raw deal. Only time will tell what the company's next move would be. The next buyback, if ever it happens, will most likely to be done at a higher price.
When it comes to voluntary delisting of shares of a company, some shareholders may not be in favour if it, especially if they have purchased the stock at higher prices. However, sometimes things may be beyond their control if majority of shareholders agree to final buyback price. Hence it is very important to adequately diversify one's portfolio by investing in 20-25 stocks for optimum wealth creation. Click here to get started now.