Till recently, buying shares of Indian subsidiaries of multinational companies (MNCs) with low public floats seemed a sure recipe for super returns. A number of MNCs have bought out minority shareholding at a premium, thanks to the preference of owning 100% of their subsidiaries. So much so that the remaining listed MNC subsidiary stocks traded at a considerable premium to fair value, in the hope that minority shareholders will eventually be bought out through an open offer.
The Securities and Exchange Board of India’s 2013 deadline for listed firms to increase public shareholding to 25% at first provided a boost to such an investment strategy. The hope was that some MNCs wouldn’t be able to meet the deadline and will be forced to de-list.
But, it now turns out that the investors using this strategy were too smart by half. The foreign parents of two companies—Fresenius Kabi Oncology Ltd and Disa India Ltd—have diluted their holding to the required 75% using the offer for sale route. They had to sell equity worth 15% and 11.5%, respectively, to meet Sebi’s requirement, but used this route, taking investors completely by surprise. Now, promoters of Honeywell Automation India Ltd and Blue Dart Express Ltd have announced that they, too, will dilute their stakes rather than buy out minority shareholders. Honeywell shares had risen sharply this month, but gave up the gains and fell some more after the firm rejected the de-listing plan. The impact on investors is telling. According to data collated by Capitaline, the subsidiaries of 14 MNCs have a promoter shareholding of over 80%. Barring three, the stocks of the rest have fallen by 25-50% from their 52-week highs.
Some investors may still end up making decent returns if some MNCs decide to use the delisting option. But with a number of multinational parent firms now exercising the option of diluting their stakes, the uncertainty has increased considerably. Investors have themselves to blame for bidding up prices high and demanding their pound of flesh in the reverse book-building process used to determine the delisting price.