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Essar Oil Delisting: IiAS Votes In Favour

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With a fortnight to go before shareholders decide on the delisting of Essar Oil from equity markets, proxy advisory firm Institutional Investor Services of India (IiAS) has come out with a report advising shareholders to vote in favour of the move. While counter-intuitive, the advice runs on the premise that if a promoter does not want to stay listed, shareholders are unlikely to benefit out of sticking with the company. 

Essar Oil announced a delisting plan about a month ago, claiming that it would require sustained, substantial investment to develop its businesses, and that full ownership will provide it operational and financial flexibility. ‘The delisting proposal is in furtherance of the strategic intent of the promoters to achieve greater flexibility for equity infusion into the company,” says the company in it’s notice to shareholders. And that raises the biggest question mark over the proposal.

Once delisted, will Essar Oil then can sell an equity stake to another investor, for example, another oil company like Shell, at a much higher valuation? Will the current investors who tendered their shares at a lower price be deprived of the benefits of that valuation? The concerns are amplified by the fact that the company is just turning around, having recorded a profit last year, after two consecutive years of losses.
While the stock price has almost doubled since the beginning of the year, the price is still a third less than it was five years ago. So, a shareholder who was invested in the company for the last five years and had a loss to show for his efforts, now is being asked to cash out at a time the company is probably turning around. Delisting, under Sebi rules, involves a process of price discovery, where above a certain price, each shareholder can indicate the price at which he is willing to part with his shares, and the price indicated by the maximum number of shareholders becomes the delisting price. On the other hand, in the absence of an independent valuer with access to the company, it will be difficult for a shareholder to arrive at what would be the fair value of the share.

IiAS, in its report, asks shareholders to press for two commitments from the board of the company. That the company will not re-list it’s shares in the next five years, and that it will not enter into a strategic divestment in the next three years. Implied is the demand that if the valuation of the company increases in the foreseeable future due to a further change in shareholding, then current shareholders should be entitled to a share in the pie. That seems to be a fair demand to make.