Fixed-price delisting resists manipulators – The Economic Times

Delisting serves up prospects of both manager and investor opportunism. The mechanism to delist is designed to reduce excesses on either side. The price of the stock serves as the gatekeeper, and manipulation – by managers taking companies private in a downturn and by investors raising the buyback hurdle – is commonplace. The exit mechanism benefits by reducing the scope to influence the price discovery process. This is what Sebi is proposing through fixed-price delisting. The offer fails if the price is not right. This does not alter the power balance between majority and minority shareholders available in a process of discovering price through auction.

Since the decisions to list and delist are essentially managerial, the price on offer for either action is ideally left to managers. Investors have the choice of accepting the price in an IPO, and are adequately served by a similar dispensation for companies trying to go private. Leverage and profit retention are the principal reasons for companies to choose one over the other, and there is barely any information asymmetry between managers and investors on these metrics. If debt is the cause of delisting, investors get downside protection. If dividend is the reason, their upside is capped.

The market regulator’s concern would be to smoothen voluntary exit, so that mandatory delisting – by which time investors have lost their shirt – is reduced. There has been a spike in mandatory delisting in India with the introduction of bankruptcy resolution. An efficient marketplace requires systems to bring down the proportion of zombie companies that block capital. Smooth delisting has a co-dependency with accelerated liquidation. Delisting has been gamed by operators to seek super-normal profits from companies that are doing well as well as companies that are not. It is time the regulatory gaze turns on this aspect of India’s equities market. As Indian companies gain the freedom to list overseas, Indian exchanges will have to offer comparable entry and exit protocols.