The Financial Literacy Cell
ALL ABOUT VEDANTA- THE DELISTING OF A NIFTY 50 STOCK
“Vedanta gets an in-principle nod for delisting from BSE, NSE”- This is the news that is buzzing in the stock market world these days. Now, why is it? More than 40 companies got themselves delisted in the last 10 years! So, what's so special about the Vedanta delisting? Well, it is a Nifty 50 stock that is getting de-listed and not just any sundry stock. And it is not every day that a Nifty 50 stock gets de-listed. Moreover, a huge proportion of investors have Vedanta’s shares in their portfolio. So, everybody has got their eyes fixed on the TV screen to know the final exit price.
Another thing that got Vedanta in the headlines recently is its issuance of Junk bonds with a coupon rate of 13.2%. Financial websites called it a “crucial test of investor appetite for Indian junk debt.” However, if you don’t know what's the Vedanta story, don’t worry since we dive deep into the case in this article.
Vedanta is a leading producer of Oil & Gas, Zinc, Lead, Silver, Copper, Iron Ore, Steel, Aluminium & Power with Vedanta Group as its parent company. Vedanta Group has been pursuing a process of corporate simplification for several years.
Corporate Simplification (CS) is a strategic process to rationalize a complex group structure by releasing capital, increasing efficiency and reducing financial and administrative burden.
Well, Corporate ‘Simplification’ didn’t seem that simple to understand, did it? Don’t fret. Simply put, simplifying the corporate structure helps the company to free up time and money, reducing risk, and sets it up for growth. Delisting of Vedanta was considered to be a logical step in this simplification process since simplifying corporate structure is easy for an unlisted company due to reduced regulatory compliances.
Delisting involves the removal of listed securities of a company from a stock exchange on a permanent basis.
It will provide the Group with enhanced operational and financial flexibility in a capital-intensive business and will support debt reduction programs & pave the path towards an attractive long-term growth pipeline.
Hence, the company in May 2020 had announced its decision to delist from the domestic stock exchanges by buying out non-promoter shareholding.
Vedanta Resources has since then mobilised $3.15 billion to fund the delisting - $1.75 billion from banks for a 3-month term loan facility and another $1.4 billion from 3 year-amortising bonds with initial price guidance of around 13.25% putting it in the category of junk bonds.
Junk bonds are high-yield bonds that are rated below investment grade. They carry a higher risk of default than other bonds, but they pay higher returns and hence make them attractive to adventurous investors.
Vedanta marketed a dollar bond which was a crucial test of investor appetite for Indian junk debt. The fundraising was critical for Vedanta Resources as it planned to delist its Indian unit Vedanta Ltd. The proceeds of the offering were decided to be used to partially fund the privatisation. Any surplus money was to go towards a tender offer of Vedanta Resources 2021 dollar bonds or repayment of the securities at maturity.
Let’s come back to our timeline.
In June this year, Vedanta received shareholders' nod for delisting the company. The firm, through a postal ballot, had sought shareholders' nod to delist after VRL (the parent group), which owns 50.14 percent of Vedanta, offered to buy out about 49.86 percent of public shareholding at an indicative floor price of ₹87.5 per share. This is the price where acquirer is ready to buy all the shares. Means, the Floor price is a price that is the fair value of the company’s shares, according to acquirer.
But wait a minute! An acquirer will always try to buy shares at the lowest price. So, why wouldn’t the acquirer indicate a low fair value of shares (through Floor price) when the real value of shares could be much higher? Possible! To overcome this problem, there is a measure in Delisting Guidelines (issued by SEBI) which helps to find out a fair value of shares, from the viewpoint of public shareholders. This is the next thing we will discuss.
On 29th September 2020, Vedanta received in-principle approval from stock exchanges -- BSE and National Stock Exchange of India (NSE) -- for its delisting from the bourses.
Post-approval, the company's parent VRL and its subsidiaries issued a public announcement about the delisting offer. The reverse book-building process for public shareholders to tender their shares would take place over October 5–9, which would result in the discovery of the final offer price.
Reverse book building is the process through which a company that wants to delist from the bourses, decides on the price that needs to be paid to public shareholders to buy back shares.
Without 90 percent+ holding of acquirer, the delisting process will not be considered as successful and therefore, shares of the company will continue to trade on the exchanges
Upon the discovery of the final exit offer price, the promoter group would have the option either to accept or reject the price. In case the final exit offer price is not acceptable to the promoter group, it could make a counter-offer within two working days from the discovery of the final exit offer price, i.e., October 13, 2020. The promoter group is required to announce within 5 working days from the closure of the bid period, i.e., October 16, 2020, regarding the success of the delisting offer, along with the final exit price, or the failure of the delisting offer. If the delisting offer is successful, the promoter would be required to pay the consideration to public shareholders within 10 working days of closure of the bidding period, i.e., 23rd Oct 2020. Following the payment of consideration, the company would make the final application to the stock exchanges. Upon receipt of their approval, equity shares would be delisted. The rest of the public shareholders may tender their equity shares to the promoter up to one year from the date of delisting. And, in this case, the promoter would accept the equity shares at the final exit offer price. Continuing public shareholders shall have the right to vote and receive dividends.
There you go! You now have full knowledge about the Vedanta de-listing. Buyout of public shares in case of de-listing is always done at a premium over and above the market price of shares. And, the market price of Vedanta has been increasing ever since their de-listing announcement; which means a higher exit offer price. After knowing everything, we’re pretty sure you can’t stop thinking what the final exit will be! Neither can’t we. Fingers crossed!
By Ridhi Gera