For India Inc, going private isn't easy

Less than 24 hours after he decided to take Dell private through a $24.4-billion buyout deal, Michael Dell is already facing a tough time, with quite a few shareholders taking a dim view of the price.

Companies in India would empathise with Dell as their delisting experience hasn’t been easy, either. Take Cadbury India, for example. Its delisting move has been stuck since it was announced in 2003, as minority shareholders demanded a 50 per cent higher price than the Rs 1,340-a-share Cadbury proposed.

“We think the company did not offer us a good exit price and it was not valued like its peers, such as Nestle,” says small investor Sobhana Mehta.

Cadbury has company. Shareholders of Essar-owned India Securities had protested against delisting move last year, saying the shares were infrequently traded and, hence, the company was not valued properly while going private.

In last five years, 200 firms have delisted their shares from Indian stock exchanges - mainly due to a merger or acquisition activity.

The race to delist shares began after the Securities and Exchange Board of India (Sebi) came out with a fiat of a minimum 25 per cent public shareholding in listed entities. Companies with more than 75 per cent promoter shareholding had the option: Either go private or dilute shareholding to 75 per cent.

But companies soon realised minority shareholders, led by institutions, were not enthusiastic about exiting, even when a company’s shares were valued by independent valuers. Last year, only 11 companies went private (see table). Many like Carol Infoservices, owned by Wockhardt’s Khorakiwalas, are still sending out letters to shareholders, offering to buy back their shares.

While small investors have in the past taken erring companies to court, domestic institutions have remained passive investors and have seldom voiced their opinion. A top official of LIC, the biggest investor in Indian firms, says LIC takes case-to-case decision on selling shares during delisting or an open offer. LIC and other institutions like GIC and UTI have rarely made their stand clear on these issues.

Shriram Subramanian, MD, InGovern, a corporate governance research firm, says: “The exit price determined by reverse book-building process in India takes care of price discovery. This process generally takes care of minority shareholders’ interests in pricing.”

To avoid a shareholders versus management fight, Subramaniam advises that the global best practice is that shareholder approval for delisting is based on a majority of minority shareholders voting for it.

But the main problem is pricing. Firms that have done right pricing have had it smooth. For example, Alfa Laval offered Rs 4,000 a share, as against the discovered price of Rs 3,000 a share. The delisting offer received an overwhelming response from shareholders.