Delisting norms need modifications
Securities need to be categorised in terms of their trading frequency and illiquid ones penalised
M R MAYYA
The recently announced draft norms for delisting companies from stock exchanges stipulate, inter alia, that the securities of a company may be delisted if they have remained ‘infrequently traded’ during the preceding three years or the shareholding held by the public has fallen below the minimum level applicable under the listing agreement. Both these norms need modification in the interest of investors.
The only definition of ‘infrequently traded’ securities available is in clause 20(5) of the Sebi (Substantial Acquisition of Shares & Takeovers) Regulations which states that shares shall be deemed to be ‘infrequently traded’ if the annualised trading turnover during the preceding six calendar months prior to the month in which the public announcement of acquisition of shares from the public is made is less than 5% of the listed shares.
In 2005-06, out of 7,311 securities listed on the BSE, only 3,049 were traded, of which 87 were traded for 31 to 60 days, while 243 were traded for 30 days or less. Apart from the 4,262 securities not traded, it can be reasonably deduced that 330 securities were ‘infrequently traded’. Over a time horizon of three years, the number of ‘infrequently traded’ securities may be less. Delisting over 4,500 securities, amounting to more than 60% of the listed securities, will be a blow to the investors. There are, at any point of time, those wanting to sell and those wanting to buy, but at a price. Absence of market makers after the automation of trade is responsible for this dismal state of affairs. The answer to illiquidity is not delisting, but to categorise securities under different heads such as liquid securities,—securities traded for more than 90% of trading days; thinly-traded securities—for at least 25% of trading days; marginally-traded securities—for at least 10% of trading days; and illiquid shares, which are hardly traded.
Illiquid securities may be delisted after giving proper notice to the companies to increase liquidity by increasing the paid-up capital and public shareholding, if companies fail to generate at least some modicum of liquidity. For the thinly- and marginally-traded securities, liquidity must be generated with steps like compulsory appointment of market makers by companies, a call auction system, etc.
Proper facilities by way of supply of stock and borrowing of funds on reasonable terms, fiscal incentives to market makers and weekly contracts are needed. Norms for spreads of market makers have to be liberal. In fact, jobbers on the BSE not subject to any norms used to generate liquidity in most of the listed shares, albeit with wide spreads. Delisting may be considered only for companies that fail to comply with the above. The problem is investors loaded with illiquid shares have no exit route. They can’t write off the losses, as under the I-T Act, it is possible only if there is a transfer.
One possible answer is that asset reconstruction companies (ARCs) buy these shares at a nominal value of say one paise a share so investors can book losses while the ARCs can hope for a sunny day. Alternatively, the I-T Act can be amended to let shareholders of the delisted securities to claim the losses treating the value of such securities as zero. The losses could be set off against taxable long-term gains, if any.
With regard to the norm for delisting securities of a company where the shareholding held by the public has fallen below the specified minimum, the answer is not to delist, but to direct the companies to raise the level of public shareholding to the prescribed level within a reasonable period, say a year. If a company still fails to manage this level, penal action should be taken against its promoters and directors. The quantum of fines may be related to extent of the slide below the minimum level. If the company fails to achieve the level within the deadline, it may be given a grace period on payment of a higher fine. If it still fails to raise the level of public shareholding to the minimum level, delisting needs to be considered.
Even the norms for delisting of securities of a company which has incurred losses in the preceding three years and its net-worth has declined to less than its paid-up capital needs reconsideration. Quite a few companies in this category have the potential to turn into profit-making ones. As long as these comply with listing requirements and as long as the public shareholding in these companies comply with the minimum level, there is no need to delist their securities.
Another attendant development arising from the proposed delisting norms will be that almost all delisted companies will be from the BSE (apart from regional exchanges) and practically none from the National Stock Exchange. This will accentuate the growing monopolistic position in exchanges, detrimental to the healthy development of the capital market.
There is a growing tendency among some cash-rich companies, particularly multinationals, to buy back shares through a public offer and get them delisted. This goes against the basic objective of widening the shareholding population of the country and thereby ensuring that the fruits of growth are shared by a wider segment of society.
Article 39 of the Constitution states that “the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.” One possible way to dissuade companies from delisting is a higher level of taxation on widely-held companies, which include listed companies—a system abolished by the Finance Act, 1992.
—The author is a former executive director of BSE email: [email protected]
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