The Delisting Failure of Vedanta Ltd

Vedanta Limited is one of the leading mining companies based in India. It operates iron ore, gold, and aluminum mines in the states of Goa, Rajasthan, and Odisha. As you may have noticed, the company has been all over the news since May. They had announced plans of delisting its shares. But now, after almost 5 months, its delisting offer has failed. Let us understand what the process of delisting is, and why Vedanta Ltd may be investigated by the regulators on this matter. 

Index

1. What is Delisting?
2. Why did Vedanta decide to Delist?
3. How does a company delist?
4. What happened after the failure?

What is Delisting?

In simple terms, delisting refers to the permanent removal of a company’s shares from the stock exchange platform. When a company goes public, its shares get listed on the stock exchanges. Retail investors like you and I are able to buy or sell these shares. At some point in time, the company may decide to become private again. Generally, this decision is made when the company has plans to expand and restructure, or if the promoters want to raise their stake in the company. This is one type of delisting which can be categorized as voluntary delisting. Thus, they will have to delist its shares from the stock exchanges. The company’s shares will no longer be traded in the NSE or the BSE. 

The second type of delisting is involuntary delisting (or compulsory delisting). This happens when a company does not follow the rules set by the regulatory authorities such as SEBI. For example, when a company does not pay the annual listing fees to the stock exchanges, it can get delisted as a form of punishment. Involuntary delisting can also happen if a company is completely unable to pay its outstanding debts, ie, when it goes bankrupt.

In this particular case of Vedanta Ltd, the company has decided (by itself) to delist its shares from being traded in the stock exchanges.

Why did Vedanta decide to Delist?

Now, you may wonder why a company listed on the stock exchanges decides to just remove its shares from being traded. In the case of Vedanta Ltd, the share price had been around Rs 130-140 per share at the beginning of the year. In May 2020, the promoter group of Vedanta Ltd held 50.14% in the firm. Around the same time, stock prices had been trading at very low levels, as the Covid-19 pandemic had affected their production activities. The promoters decided that it was time to buy out the rest of the company. They have stated that “corporate simplification” is the main motive for delisting. Corporate simplification means that the company is planning to change its overall structure into a more efficient and organized system, which would help them to reduce costs. Experts say that this move would bring improvements to the operational and financial flexibility for this capital-intensive business. The mining industry always requires large amounts of investment to produce goods and needs a high level of plant and machinery.

It has also been reported that its parent company, Vedanta Resources, has a high debt of $ 6.7 billion (~Rs 49,186 crore), out of which $1.4 (~ Rs 10,277 crore) billion is due to be paid in the current financial year.

How does a company delist?

1. Firstly, a Board Meeting of the promoters and directors of the company would be held, to decide whether to delist its shares or not. 
2. If they agree to go ahead, the company informs the stock exchanges about their decision. Then, the floor price is calculated. The floor price is the minimum price at which the promoters are willing to buy shares from the public shareholders. 
3. Once the floor price has been set, they seek approval from the shareholders. This is a very important step, as a special resolution has to be passed by the shareholders.
4. The Board of Directors then appoints a merchant banker, who is in charge of seeking approval from the stock exchange.
5. The promoters advertise the offer, and sends a letter detailing the floor price to all the public shareholders.
6. If there is a majority approval by the shareholders, the Reverse Book-Building (RBB) process will be initiated. In this process, the shareholders of the company quote a price (or make bids) at which they are willing to sell their shares. Shareholders will be able to do this through an online bidding system on the stock exchanges, which will be open for a total of 5 days. A final price (also known as the discovered price) is announced on the last day of the reverse book building after all the bids have been taken into consideration.
7. Delisting will be successful, only if the promoters buy out these shares from the shareholders, and reaches a 90% ownership in the company. Thus, the company can become private again.
8. The company will make a final payment to the shareholders.

In normal circumstances, if the shareholders and the Board of Directors agreed on the discovered price, the delisting process would take a minimum of 8-10 weeks (from the date of announcement of shareholder approval).

On the 18th of May, the Board of Directors of Vedanta Ltd held a meeting to decide whether Vedanta Ltd should be delisted or not. They had proposed a floor price of Rs 87.25 per share. This was a 9.9% premium over the closing market price of Rs 79.6, as of 11th May 2020. This was not the final offer price for the delisting. The final offer price is determined by the merchant banker, who was appointed to carry out the Reverse book building process. In June, 93% of all shareholders and 84.3% of public shareholders had given their approval to delist the shares of Vedanta Ltd. The RBB process began on October 5th and concluded on October 9th. 

Life Insurance Corporation of India (LIC), which held 6.37% in Vedanta, offered to sell all its shares at Rs 320 per share, which was a 267% premium over the floor price of Rs 87.5. What this meant was that, if the delisting was successful, promoters would have to delist the shares at Rs 320 per share. This development was obviously not good for the promoters, as they would have to purchase the shares at such a large amount of money. As reported by major publications, shareholders could bid at an average price of anywhere between Rs 140-300 per share.

What happened after the failure?

On 10th October, Vedanta Ltd became the third company in the past two years to have an unsuccessful delisting, after INEOS Styrolution and Linde India. In a regulatory filing to the Bombay Stock Exchange (BSE), the company stated the following: Out of the 134.1 crore shares that were required to successfully delist, only 125.47 crore bids were confirmed. This means that 12.31 crore shares were not confirmed. As 90% ownership had not been secured by the promoters, the delisting offer had failed. After this announcement broke out, shares of Vedanta saw a fall of 20.43% to Rs 96.95 on 12th October.

Now, the company has to release all the shares that had been tendered (offered) by the shareholders within 10 days, and promoters cannot acquire any of these shares. However, the promoters can make a counter-offer within two working days. A counter-offer is a fresh offer that is usually made when the discovered price is not accepted. As per SEBI delisting rules, the counter offer price cannot be less than the book value of the company. It should be noted that the management has not made any announcements of a counter offer within 2 days of the delisting failure.

The main reason for the failure of the delisting process of Vedanta Ltd is not clear. Reports have stated that a technical glitch in the bidding process could have caused a wrong result. On October 9th, the bidding process was supposed to close at the end of market hours, but the shareholders were facing certain technical problems. The Bombay Stock Exchange allowed the bidding to continue till 7 PM. At a given point, it had been reported that the 90% level had crossed. However, at around 7:35 PM, the BSE website showed that only 125.47 crore shares were confirmed. Other experts have questioned the fact as to why 12.31 crore shares were not confirmed, even though the shareholders had put in a bid for it. 

The non-confirmation of such a large number of bids makes us wonder what went wrong, and at which point everything went wrong. Did the shareholders not want the company to delist? Also, even if 90% of the shares were bid, wouldn't the final discovered price be very high compared to the promoter's floor price? Market regulator SEBI may initiate a probe into the matter, and let us wait and watch what the management decides to do next.