Delisting may increase governance risks, credit impact uncertain: Fitch Ratings2 min read . Updated: 11 Jun 2020, 03:39 PM IST
- Funding used by the parent to purchase shares in subsidiary will determine the group's post-privatisation capital structure and ultimately the financial profile of the group
MUMBAI: As some Indian companies gear up to delist their stocks from the exchanges, Fitch Ratings has said the credit impact on these firms is uncertain while a highly concentrated shareholding could increase governance and key-man risks.
HT Global IT Solutions Holdings Limited and Vedanta Resources Limited have announced plans to delist their Indian subsidiaries Hexaware Technologies Ltd (Hexaware) and Vedanta Limited (VLTD), respectively, while Adani Power Limited is also considering a delisting.
The announcements follow relaxation of delisting norms in India and a fall in share prices in recent weeks, which have given major shareholders the incentive to delist companies to simplify corporate structures and gain greater control.
According to Fitch Ratings, funding used by the parent to purchase shares in the subsidiary will determine the group's post-privatisation capital structure and ultimately the financial profile of the group.
"The credit impact of some Indian corporates' plans to privatise will be largely driven by their funding and capital structures post-privatisation and the effects these will have on the linkages between various entities in the groups and cash flow access," said Fitch Ratings.
It added that delistings allows corporates to simplify or reorganise complex group structures without the interference of large minority investors. While more efficient group structures could lead to improved operations and faster execution, a highly concentrated shareholding could increase governance and key-man risks, Fitch warned.
According to Fitch, while financial profile of the group will benefit from lower dividends to minority shareholders after a delisting, additional debt and the related interest burden for the privatisation may negate this benefit.
It said delisting will give parent entities like HT Global and VRL better access to their subsidiaries' cash flows, which could help the parents deleverage. However, a parent's desire for cash returns may also lead to higher dividend payouts from its entities, which will limit the pace of deleveraging at the group level.
Fitch expects Vedanta’s parent to fund its delisting through debt. It feels that it may boost the group's leverage, the extent of which will depend on the final acquisition price. "The increase in leverage could be offset by cash savings from lower dividend payments to minorities and greater efficiency through a simplified group structure," it added.
Final delisting prices are determined by reverse book-building process and require approval from at least 90% of shareholders. However, the recent changes to the delisting rules allow an acquirer to make a counter offer if the price discovered during the reverse book-building is not acceptable.
The completion of any delisting is subject to the final delisting price and the ability of the parent to raise sufficient financing.