share delisting is thought to be the best way for a windfall to happen to a stock investor. But very often it is not. For retail investors, it can be as much a harrowing experience as it is with any other investment.

First, whatever may be the reason of delisting, no company would like to throw away cash to mop up shares in public hands, and often the bargain gets tough, even leading to withdrawal of such offers. Secondly, while delisting of shares may bring in some quick gains to a minority shareholder, on a long-term basis s/he loses out on an opportunity to participate in a possibly bigger growth story of the company.

Thirdly, the income tax maths are a bit skewed in this case, as you might end up paying the whole premium as tax outgo if you offer the shares under the buyback window, while if you want to escape taxation by selling the shares in the open market, you might lose out on the premium that shareholders often manage to squeeze out of the bargain

Dalal Street has seen a rush of companies to delist shares after the market suffered a prolonged slump, leaving most stocks far below their long-term average valuations, and the deadline for the enforcement of the 25 per cent minimum public holding for private sector listed companies drew nearer. With the overall projections for the stock market for the next two years showing a lot of improvement, promoters contemplating a complete withdrawal from the market find themselves in the most opportunate time to mop up their public float.

So, we have had Walt Disney launching a delisiting offer UTV Software; Wockhardt promoters Khorakiwalas trying it out for Carol Info Services; Sweden-based Alfa Laval announcing delisting of its India unit; iGate going for delisting of Patni Computer and Japanese auto component maker Exedy Corp floating an offer to delist Exedy India, among others.

Brokerage ICICIdirect recently listed some 18 companies, including Alfa Laval India, as potential delisting candidates. They included Oracle Financial Services, Novartis India, Honeywell Auto, Timken India, Thomas Cook (I), GMM Pfaudler, Fresenius Kabi Oncology, Ineos ABS (India), Singer India, Kennametal India, Fairfield Atlas, Wendt India, Warren Tea, Gillette India, Astrazeneca Pharma India, Blue Dart Express and 3M India — companies where their promoter entities hold over 75 per cent stakes.

“To arrive at this list, apart from promoter holding, we have also applied the criteria of more than 10 per cent return on capital employed (RoCE) and checked availability of funds to buy back the public holding,” said Pankaj Pandey, head of research at ICICIdirect.com.

Companies, particularly fundamentally strong ones, go for share delisting as it allows them better flexibility in taking business decisions and they do not have to adhere to a multitude of corporate governance and public disclosure rules. For many multinational companies, which had earlier listed their Indian arms on stock exchanges in order to adhere to sectoral caps on foreign direct investment now find themselves unshackled as the government has over the years lifted these limits for most sectors.

“Many companies will need to take a call quickly on whether they would like to increase public shareholding to the 25 per cent level or go for delisting,” said Jagannadham Thunuguntla, head of research at SMC Global.

“The case for delisting becomes stronger in the market now, as stocks have seen a substantial fall in providing an opportunity for companies to buy out the remaining stake with the public at lower valuations,” said Pandey.

But it may not be a cakewalk for them. Take the case of the delisiting offer for UTV Software, which closed just two weeks back.

While Walt Disney had fixed the floor price at Rs 835.03, most investors tendered their shares at Rs 1,100.

There lies the catch for investors. If Disney were to accept this price, investors who sold their shares through the open market at Rs 1,000-1,050 would lose out on that premium. But those selling shares under the delisting window and availing this premium will be taxed at the individual’s normal tax rate for short-term gains, and at 10 per cent without indexation (or 20 per cent with indexation) for long-term gains. On the other hand, those who sold the shares through open market will pay no tax if they made a long-term gain, while those who held them for less than a year will pay 15 per cent tax.

But the multi-million-dollar question is at what stage should an investor accept a delisting offer. Some market experts say an investor has every right to avoid an offer if s/he finds the offer price too low. Instead, s/he should quote own price for the shares offered. The company does have a right to reject shares. But for a delisting offer to be successful, rules require a company to acquire the higher of either 90 per cent of the entire shareholding (after all acceptance) or 50 per cent of the delisting offer size.

If a delisting offer succeeds and a stock gets delisted, the investor still has a better deal as the company will have to offer another six months for the remaining shareholders to tender shares at the finally discovered price.

In stocks where institutional investors have sizeable stakes, minority investors can expect a better deal as the former often manage to bargain a better price to tender their shares.

According to ICICIdirect’s Pandey, the chances of a delisting offer succeeding appears better now due to a moderation in returns expected by stock investors and their willingness to exit stocks even at a marginal premium to the current market price.

bijoysankar@mydigitalfc.com