Mumbai: Shares of some Indian units of multinational companies (MNCs) zoomed on Monday as investors rushed to buy them on speculation that a new government rule will make these firms opt for a buy-back and delist from the exchanges.
Some of the stocks rose by as much as 13-14% on a day when the Bombay Stock Exchange’s bellwether equity index, the Sensex, fell nearly 2% on fears that the European debt crisis had spread to Hungary.
On Friday, the government notified rules asking all listed companies to ensure a minimum public shareholding of 25%.
This might prompt some MNCs, where the promoter holding is more than 80%, to delist rather than comply with the new norm, said analysts.
Delisting would free them from regulatory compliance requirements such as responding to investor queries and incurring a cost on publishing financial results?every quarter among others.
“It is a play on delisting,” said Ashutosh Datar, assistant vice-president at Mumbai-based brokerage India Infoline Ltd’s institutional equities unit. “The premium would depend on individual companies.”
“These stocks will thus likely move up sharply in the short term, as expectations of delisting at a higher price start building in,” wrote Datar and his colleague Nemkumar in a note on Monday.
The shares of plastic maker Ineos ABS Ltd rose 14.22% and those of gear maker Fairfield Atlas Ltd, 13.87%. Promoters own 83.33% in Ineos and 83.91% in Fairfield. Drug maker AstraZeneca Pharma India Ltd, whose promoters own 90%, saw shares rise 10% as investors bought in hopes of a delisting. Other MNC stocks with a parent holding above 75% include Oracle Financial Services Software Ltd (OFSSL) and 3M India Ltd.
The capital market regulator has made it difficult for firms to delist, but several of these have attempted to do so in the past.
For instance, the units of global drug makers Novartis AG and Pfizer Inc bought back shares in 2009 to raise promoters’ stakes with plans to eventually delist the firms over a period of time. On the other hand, Oracle’s India unit was unsuccessful in delisting itself in December 2006.
“Considering Oracle’s practice of delisting its subsidiaries worldwide and increase in its holding in OFSSL through preferential allotment, open offer and acquisition from the open market over the span of last five years, we believe the new modification in rule increases probability of de-listing of OFSSL by Oracle,” wrote Hardik Shah, an analyst at Asit C Mehta Investment Intermediates Ltd in a 7 June note.
According to Friday’s notification of the Securities Contract (Amendment) Rules 2010, firms will have to comply with the 25% public listing rule by diluting at least 5% every year.
It is not clear what would happen to a firm that fails to increase public shareholding in the stipulated period and at the same time doesn’t succeed in delisting. “One of the basic legal principles is that law cannot demand a person or company do what is not in their power,” said Sajan Poovayya, managing partner at Bangalore-based law firm Poovayya and Co.
“One would hope that Sebi (the Securities and Exchange Board of India) would take into account the fact that sometimes it may not be in the power of companies to comply with the requirement and make provisions for such an eventuality,” Poovayya said. He added that from a legal standpoint, the new norms may be challenged and possibly struck down.
Not all companies, whose shares gained Monday, want to delist, though.
“The notification has just come and we are in the process of studying the finer details. Our plan is to comply with it as early as possible,” said Rakesh Bhargava, vice-chairman and managing director of Fresenius Kabi Oncology Ltd, whose shares gained 6% on Monday.
C.H. Unnikrishnan contributed to this story.