Delisting: What should an investor do?

Mon, 6 Feb Pre-Open

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The Indian stock markets are abuzz with a slew of potential delisting offers. Delisting refers to the process wherein the shares of a listed company are permanently removed from being publicly traded, without reducing the capital permanently. While delisting is a voluntary option for the company that might be looking at opportunities like promoters wanting to increase their stake (especially when stock remains undervalued) or any merger opportunity; the situation may put an investor in a dilemma of whether to exit the stock or remain invested.

As a lot of companies like Alfa Laval, Carol Info, Patni Computers and UTV Software have announced their delisting offers, let us discuss the options that an investor has. It's a common phenomenon for the stock prices to rise once the markets sense the delisting event. Those getting lured by potential short term gains should be prepared for the event wherein the stock may not get delisted finally. This will happen when company does not accept the price offered by investors to buy the statutory minimum 90% for delisting. This can lead to a substantial crash in the prices and can be devastating for the ones who get carried away by speculations overlooking the fundamentals.

While it may be hard to resist the temptation to make short term speculative gains, one must keep in mind the financial and business fundamentals before joining the crowd. If the fundamentals remain robust and the company does get delisted, the decision to remain invested or exit should be based on the whether the premium at the time of delisting offers good investment returns. Having said that, it might not make too much sense for a minority investor to remain invested even if the delisting price doesn't look lucrative enough and if the future of the company looks uncertain or unclear. This is because while being invested entitles an investor to benefits like bonus, dividends, etc., he loses the opportunity to sell these shares in the secondary markets unless the firm gets relisted. In this case, the only way to liquidate the scrips is a direct negotiation with promoters/buyer wherein the price discovery gets compromised (as this becomes an off market transaction).

To conclude, the investors should stick to the fundamentals of value investing and refrain from making speculative bets regarding delisting to avoid burning their fingers in case the delisting offer is called off.