How does a Final Delisting Price is decided? [Rules in India]

“Now, it is time to say Goodbye dear shareholders. You supported the company a lot.”

That is what exactly happens when a company starts delisting process.

Delisting of shares involves removal of listed securities of a company from a stock exchange where it is traded on a permanent basis.

Voluntary Delisting (when a company itself decides to delist its listed securities) is not as common as its opposite IPO is! But yes, in a gap of few years, big sized voluntary delisting of shares keeps happening.

TOPICS

• Why a company goes private and delist its shares?
• What is Final Delisting price, during Delisting of shares?
• How Final delisting price is calculated and decided?
• During delisting, why Institutional Investors are so important for Promoter?
• What delisting of shares means for you?
• Why you should take exit during delisting?

Before we start discussing about how final price of a voluntary delisting is decided, we will firstly see why a company decides to go private or voluntary delist its shares from exchanges.

Why a company goes private and starts voluntary delisting of shares?

Promoter or Owner of company can delist their shares from exchanges when they want to restructure their company in such a way that it will be difficult to execute when there are small shareholders in the company and shares are listed on the exchanges.

Sometimes, when a company is acquired by someone, it is possible that the new owner of the company may not want to keep its company public and public shareholder in the company.

During such acquisitions, delisting process may be kick-started by the new promoter/owner (after when company has been successfully acquired) or by existing promoter (as per wish of the new company owner, before acquisition).

When the owner of the company no longer wants to share profits with its public shareholders or any other gain which they expect to come in near future, delisting may be used by the promoter to buy all the available shares from public shareholders and take the company private.

There could be other reasons too behind the delisting. But most of the reasons would fall under these three broader reasons.

Now when we know about why a company delist its shares from exchanges, it is time to move forward and see what is the Final delisting price or Final Buyback price in delisting process.

What is final delisting price?

Before Final delisting price could be discovered, Floor Price is announced by the acquirer who is going to acquire your shares!!

You can assume this Floor price as an indicative price where acquirer wants to purchase all shares of the public shareholders. You can also take it as a price where acquirer is ready to buy all the shares.

Means, Floor price is a price which is fair value of the company’s shares, according to acquirer.

But wait a minute!!

An acquirer will always try to buy the shares at lowest price! So, why they wouldn’t indicate a low fair value of shares (through Floor price) when real value of shares could be much higher?

Definitely possible!!!

To overcome from this problem, there is a measure in Delisting Guidelines (issued by SEBI) which helps to find out a fair value of shares, from the viewpoint of public shareholders.

The fair price discovered through this measure is important in Delisting process. But that is not exactly the delisting price.

During delisting process, Final Delisting Price will be that price upto which if acquirer purchases/accepts all the tendered shares, holding of acquirer will exceed 90% of total shares issued by the company. At this price, company finally delist its shares from exchanges.

How does Delisting Price Calculation takes place?

Final price of delisting in voluntary delisting cannot be decided by acquirer alone!!

There is an open process through which final delisting price is calculated and decided. And this process is known as Reverse Book Building (RBB).

“The Reverse Book Building is basically a process used for efficient price discovery. You can take it as a mechanism provided for capturing the sell orders on online basis from the share holders. When Reverse Book Building is started, offers are collected from the share holders at various prices, which are above or equal to the floor price.”

Above information was about Reverse Book Building process from NSE‘s official Website.

In Reverse Book Building, when offers from shareholders have been received, a price is identified by evaluating the received offers where Acquirer can delist its shares.

During Reverse Book Building process, Shareholders are free to decide the price at which they want to give back their shares to the company. They can offer their shares at Rs 100 or Rs 1000 also. The only restriction shareholders will have to follow is that they can’t offer their shares below Floor price. So, offer price by public shareholders could be equal to floor price or higher than it.

For successful Voluntary delisting of shares in India, acquirer is required to buy atleast that amount of shares from the public shareholders which if added to the existing holding of acquirer, it will exceed 90 percent of Total Shares issued by the company!

The price upto which acquirer will be able to achieve this percentage will be announced as the Final Delisting Price.

Without 90 percent+ holding of acquirer, delisting process will not be considered as successful and therefore, shares of the company will continue to trade on exchanges.

That is how the calculation of final delisting price is done!!!!!!

If you didn’t get it how final delisting price is calculated, here is a simple example for you.

Suppose there is an ABC company which has Total 100 shares.

Out of this 100 shares, promoter of the company holds 50 shares, 3 institutional investors holds 12 shares each (total 36 shares), and small and retail shareholders (individual investors) holds remaining 14 shares.

Because of some reasons, promoter of the company now wants to delist its shares from exchanges. To successfully delist shares, promoter is required to hold 90+ percent shares of Total shares issued by the company.

So, to achieve this holding percentage, promoter will initially announce a floor price where he is ready to purchase entire quantity of shares held by the public shareholders.

(We have already discussed about what is Floor Price earlier. So, no need to discuss it here)

After that, company will required to complete all necessary formalities prescribed by the SEBI, before Reverse Book Building process could be started.

In our example, to successfully delist shares from the exchanges, promoter will required to acquire 41 shares from public shareholders.

By acquiring 41 shares, promoter will have total 91 shares (50 shares existing holding + 41 new shares purchased from public = 91 shares).

As the company has total 100 shares, every single share will represent 1 percent shares of company.

So, by having 91 shares, promoter will hold 91 percent shares of Total shares issued by the company. This percentage will easily exceed 90 percent criteria set by SEBI.

Therefore, by having 91 shares, promoter will be able to delist its shares.

But wait a minute!!!!!

Institutional investors are not going to return back their shares easily!

Promoter will have to discuss with institutional investors regarding what share price these investors think appropriate and at what price they will release their shares.

During Delisting, Institutional investors would not give back their shares until some good price is not offered to them. So, promoter will have to consider this thing to increase chances of successful delisting.

Why Institutional Investors are so important for Acquirer during voluntary delisting of shares?

In our example, without of shares held by Institutional investors, promoter will not be able to meet 90 percent criteria even if all retail shareholders returned back their shares during reverse book building.

In ABC company, retail shareholders holds only 14 shares and promoter holds 50 shares. Even if promoter’s shares and retail shareholders shares are combined, total shares will be just 64 shares or 64 percent shares (company has total 100 shares, so every single share will represent 1 percent shares of company).

This will be much below of 90 percent criteria.

Therefore, promoter will have to make some deal with institutional investors and ready them to release their shares (if they are not ready yet).

.

.

.

.

.

Eventually after putting a lot of mind, 2 institutional investors are now ready to give up their shares at Rs 150 and third one is ready to give up their shares at 180 rupees.

After this discussion with investors, Reverse Book Building process officially started and most of the public shareholders submitted their respective bids.

Thereafter, it was begin to find out at what prices small shareholders are ready to sell their shares.

It was discovered that 4 shares have been offered at Rs 160, 1 share has been offered at Rs 170 and remaining 9 shares have been offered at Rs 200, by retail shareholders. Two Institutional investors have offered their shares at Rs 150 and other one has offered its shares at Rs 180 (as per what was discussed before).

To conclude, here is how and where different public shareholders have offered their shares during the Reverse Book Building process.

As the promoter is required to buy 41 shares to meet the 90% criteria, he will start its acquisition of shares from those which have been offered at lowest price.

He will first take 24 shares offered by 2 institutional investors at Rs 150.

After that, he will move forward and take the offer of 4 shares, which have been offered at Rs 160.

Till now, 28 shares have been collected.

Thereafter, promoter will move further and take the offer of 1 share offered at Rs 170. After this offer, promoter will take the offer of 12 shares offered by 3rd institutional investor at Rs 180.

Till now, 28+13=41 shares have been collected..

Now promoter will move futher higher and………

Wait a minute!!!!!!!!

Promoter was required to buy 41 shares to make the Delisting successful!!

And by accepting offers available upto Rs 180, he is getting 41 shares!

So, because upto share price of Rs 180, promoter can acquire the required shares, price of Rs 180 will be announced as the Final Delisting Price.

Cheers🍻… . .. ..

Shares offered upto this price will be accepted by the promoter.

But yes, shares could be accepted only when the promoter/acquirer will have enough money to pay the required amount and is ready to delist its shares at Rs 180. So, this is very important that promoter accepts this discovered Final Delisting Price.

What if Promoter declined to accept this price?

Counter Offer

In case the discovered price is not acceptable to Acquirer, then a counter offer can also be made to the Public Shareholders which will be below the discovered delisting price but enough high to attract investors.

In our case, discovered price came at ₹180. If Acquirer is not willing to pay ₹180 per share to public shareholders to delist its share from the exchanges, he can make a counter offer at a lower price say at ₹160.

If shareholders accepted this offer of ₹160 against ₹180 which was discovered through Reverse Book Building process, then ₹₹160 will be announced as the Final Delisting Price and all public shareholders whether they bid lower or higher than this price will be given ₹160 per share.

In case no counter offer was made and ₹180 price was announced as the Final Delisting Price, then Public Shareholders whether they submitted their bid at ₹180 or below this price will here be given ₹180 per share.

Now, what about those shareholders whose shares were not accepted in the Delisting Process?

In our example, even by delisting shares at Rs 180, almost 9 shares are still remaining with the public shareholders.

Because of SEBI guidelines, those who are left with shares after successful delisting or their offers were not accepted because of high price, have an option to sell their shares at the delisting price to acquirer.

Acquirer will have to accept such shares from the public till 1 year from the date of successful delisting of shares from the exchanges.

Also Read: What can we learn from previous multibagger stocks?

What happens to Shareholders when a company is delisted in India?

Like whole stock market is primarily influenced by big investors, same too happens during the Delisting of stock!

During voluntary delisting of shares, retail investors doesn’t have much influence in the discovery of final price for delisting.

If you hold some shares of a company that is going to delist, then what you can do is to offer your shares at a price which you think is right in prevailing market conditions or offer your shares at that price where you think other big investors will give their shares.

Due to some reasons, if you was not able to tender your shares during delisting, you have an option to give your shares to the acquirer at the delisting price till 1 year. And I recommend to use this option to take exit from company’s shares!

Why i shouldn’t hold those shares which are not listed on exchanges?

I suggest to take compulsory exit from shares which has got delisted from the exchanges!

When shares of companies are listed on a exchange, we are not able to properly judge many companies. Even when companies are listed, many doesn’t provide proper information to their shareholders so that public could take better decision.

And when you will hold a share of that company which is even not listed on the exchanges, how can you assume that you will be notified about every important event and decision took place in a board meeting?

Additionally, it will be very difficult to sell your shares, if company doesn’t re-listed its shares soon.

So, it is recommended to take exit during the delisting process. And if you was not able to take exit during delisting process, you can exit at the delisting price till 1 year from the delisting date.

It is mandatory for a acquirer to accept shares of public shareholders at the delisting price after delisting is successfully completed until one year is not completed from the date of delisting.

That’s all you should know about how delisting price calculation takes place in India and why it is better for the small shareholders to take exit during voluntary delisting of shares.

Now, I am ending this article.

Hope you make good decisions during delisting, if this happens to your shares.

Good luck : )