The Hindu : Exiting the bourses

Online edition of India's National Newspaper
Friday, May 03, 2002

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Exiting the bourses

CERTAIN RECENT DEVELOPMENTS in the Indian capital market are disconcerting even as they add to the woes of all its stakeholders. The trend of public limited companies taking their listed stocks off the exchanges is accelerating. For public policy there can be no readymade answers to counter this phenomenon. In the developed markets such as in the U.S. it is fairly routine to take a company private. In India, although it is a new development, there is nothing in law or capital market regulation which makes it illegal or irregular. In fact, the enabling provisions — the share buy-back and the open offer route — that facilitate the exit of companies from the bourses were put in place fairly recently. Coming on top of the existing, well-publicised shortcomings of the domestic capital market, the latest development involving the de-listing of shares by companies can seriously weaken the market apparatus. The primary market has been in a moribund state for more than three years. New offerings by quality issuers are down to a trickle. The fortunes of all its intermediaries — registrars, underwriters, brokers, advertising agencies — have been so badly affected that a majority of them have gone out of business for ever. There is a feeling that this segment of the capital market cannot be revived to being anywhere near its original state. There is an irony here. It is only through the new issue market that some of the best known multinational and domestic companies came to be listed on the Indian bourses. Now some of them see no point in continuing with an Indian listing.

Whether their pullout from the Indian exchanges should ring alarm bells depends on the likely impact of the move on the secondary market. For a variety of reasons, some justified, others only hypothetical, this segment's strength — the level of its indices especially — has come to be regarded as a barometer of the economy. Already beset with a number of problems and shenanigans, the share market has not responded to policy initiatives. The exit of some well-known scrips at this point in time can cause considerably more damage than merely diminish liquidity. Over 50 MNCs have decided to de-list. The list includes household names such as Otis, Philips, Sandvik, Cadbury and Reckitt Benkiser. While both Indian and foreign companies are de-listing, it is only the exit of the latter that has invited particular attention. Almost all of them came to the Indian exchanges in the 1970s following the FERA which compelled a domestic listing. Now that the legal environment has drastically altered, they probably see no point in continuing to be quoted in a country whose markets they are unlikely to tap for further capital. The present low valuations help them consolidate in a cost-effective manner. Interestingly, domestic companies too have gone off exchanges by buying back their shares. Neither a buy-back nor an open offer route need result in an automatic de-listing. However, stock exchanges insist on a minimum level of the capital to be traded. For most small investors, the price offered by the companies will be attractive. Holding on will be an act of folly as they are unlikely to get anything even close in the near future.

The challenge for policy is to understand the motivations behind the current de-listing, use moral suasion if possible to prevent the current exodus from becoming a stampede. Any proposed regulation to stop the companies will be arbitrary and in the context of the liberalisation counter-productive. Over time, Indian exchanges must commend themselves in a way the New York Stock Exchange or the Nasdaq does. Obviously, for Indian policy-makers much more than capital market regulation is indicated.

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