Explained: How does delisting work and why did Vedanta fail at it

Vedanta announced that it was able to garner offers for only around 125 crore shares instead of the 134 crore shares required for the delisting process to go through.

Vedanta announced on Saturday that it had failed to garner the number of shares required to complete its delisting process from the stock market. We take a look at the process of delisting and the how Vedanta fell short of garnering the threshold amount of 90% of shares of the company, even after public records initially showed that offers by shareholders had crossed that threshold.

How does the delisting process work?

In the delisting process, the promoters of a company launch a reverse book building process in which shareholders can tender their shares for purchase by promoters at a set price. The discovered price is the price tendered by shareholders at which the company is able to cross the threshold of 90% stake required to complete the delisting process. Therefore, the lowest price at which the company can complete the acquisition of 90% of shares is the discovery price.

What were the problems in the Vedanta delisting?

Vedanta announced that it was able to garner offers for only around 125 crore shares instead of the 134 crore shares required for the delisting process to go through. Earlier public records, however, show that Vedanta had received offers of over 137 crore shares. Experts note this discrepancy was a result of certain offers of share sales not being confirmed by foreign shareholders.

“Foreign shareholders hold shares through a custodian, but custodians are not allowed to participate in the secondary market and therefore bids are tendered by brokers,” explained Ravi Dubey, partner at law firm Indus Law. Dubey added that therefore, any bids placed by the broker were required to be confirmed by the custodians and that in this case, there were an unusually large number of unconfirmed bids leading to the company not meeting the 134 crore share threshold.

An expert who did not wish to be named said this process could be used to artificially reach the 90% threshold in cases where some bidders do not even own the shares, thereby giving a push to smaller shareholders to participate in a delisting process that they believe is likely to succeed. The expert noted that that the investigation ordered by SEBI was necessary to ascertain why there had been such a large number of unconfirmed bids

Were unconfirmed bids the only reason the delisting failed?

The key issue according to some experts was the discovered price at which Vedanta would be required to acquire a significant portion of shares. According to sources while a number of institutional investors had offered their stakes at around Rs 170, LIC, which holds 6.37% stake in Vedanta, and some smaller investors had offered shares at a price of Rs 320. Therefore, Vedanta would have been required to pay well over the Rs 160-Rs170 per share they had budgeted for a significant proportion of shares and would likely have rejected the offer at the end of the process even if they had been able to meet the 90% threshold of shares offered through the process.

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“The key issue was that while the promoters wanted to delist at a price of around Rs 160, they were only able to collect bid at this level for around 96 crore or 70% of the shares,” said Navin Kulkarni, CIO at Axis Securities, noting that some shareholders may have felt that the value of the stock was much higher as it was trading at around Rs 320 in 2018.

How can the issue of unconfirmed bids be resolved?

Dubey of Indus Law said SEBI should consider allowing custodians of shares held by foreign investors to bid directly in the reverse book building process, eliminating the issue of needing bids by brokers to be confirmed by custodians.

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Under the current process, he added, a single large investor may have too much influence over the reverse book building process and SEBI could consider setting price bands to restrict the prices at which shareholder can offer shares in the process. Dubey did note that such a change would require adequate safeguards to ensure that promoters were not able to take advantage of a depressed market situation to delist their companies.

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