SEBI Needs To Usher In Reforms For Listing Of Demerged Companies

Diversified companies have found that investors provide higher value to certain parts of the business, which would have been suppressed otherwise as part of the consolidated business. And to unlock the value of these high-value businesses, companies undertake a demerger of operations through a National Company Law Tribunal or NCLT process. While the process has its timeline, what is anti-minority investors is the delay in listing of the demerged entity after the main company undergoes price correction for demerger on the ex-date.

The regulations are clear to some extent, but require SEBI intervention for the subsequent process.

Diversified companies have found that investors provide higher value to certain parts of the business, which would have been suppressed otherwise as part of the consolidated business. And to unlock the value of these high-value businesses, companies undertake a demerger of operations through a National Company Law Tribunal or NCLT process. While the process has its timeline, what is anti-minority investors is the delay in listing of the demerged entity after the main company undergoes price correction for demerger on the ex-date.

The regulations are clear to some extent, but require SEBI intervention for the subsequent process.

As per the regulation upon receiving the NCLT order in writing, the company is required to announce the ex-date for the corporate action before the end of the month in which it receives NCLT order.

The record date and ex-date, which are normally on the same day, allow the company to identify the shareholders eligible to receive the shares of the demerged entity, along with the separation of book value of the demerged entity from the parent.

The struggle begins after this stage, there is a prolonged period before the shares of the demerged entity get listed on the stock exchange.

The process of listing the demerged entity could take 60-90 days and more - a gross injustice to the minority shareholders who have seen the value of the shares decline, hence the portfolio value reduced on the ex-date, and hence have to live with the uncertainty of when they could get to unlock the value.

The whole purpose of value unlocking is defeated when companies delay the listing of the demerged entities. It goes against the institutional investors and minority investors.

On the ex-date as part of the special pre-open session, when the book value is hived off from the listed parent, the investor assumes they will be able to unlock this value at the earliest. The listing of the demerged company comes with new value the market ascribes to the demerged business.

Many a time, due to liquidity during the special pre-open session, the parent stocks either correct excessively, or the street is not able to value the demerged entity properly. This market inefficiency gets corrected once the demerged entity is listed through another special pre-open session.

A delay in the listing brings global macro-economic uncertainties, changes in domestic market dynamics, business headwinds and any change in outlook in the sector into the price at which the demerged entity will list and this can be different from the factors when the stock price corrected on the ex-date.

Sebi needs to bring in a faster process for listing of demerged entities, like what it did for listing of bonus shares. This is especially when the parent stock is part of the various Indices.

The characteristics of Indian markets have changed in the last five years, passive funds, e.g., global, and domestic exchange traded funds, index funds benchmarked to Indian indices, are required to keep the demerged entity within their portfolio till the demerged entity is listed.

Moreover, foreign index providers like MSCI and FTSE indices have a 30-day deadline within which the demerged entities are required to list, pending which it segregate these unlisted companies from the portfolio. That is unfair to the investors who face an impact on their NAVs.

The classic example is the demerger underway of Siemens India. Siemens India is yet to announce the date of listing for demerged energy arm Siemens Energy. FTSE has already warned of removing Siemens Energy due to uncertainty of the listing date.

Recent demergers like ITC Hotels Ltd. and Jio Financial Services Ltd. listed in 23-33 days after the global index providers warned of removing them after 30 days, but Piramal Pharma and NMDC Steel took longer.

We are in a T+1 era in the secondary market; IPOs get listed within three days and bonus shares are issued and listed within two days. SEBI accelerated the process of listing bonus shares for trading to two working days (T+2) after the record date. This reform, effective from October 1, 2024, streamlined the process and reduced delays for both issuers and investors.

There are many demergers underway in the current market. Sebi needs to step in with directions for early listing of the demerged companies. This is because regulatorily, before a listed company goes for NCLT nod for a demerger, it requires the written nod of the stock exchanges (under the listing agreement) where the companies are listed.

If the stock exchanges are vetting the application for demerger and approving the process before the NCLT approves the demerger, there should be no reason why in this tech era, where custodians, depositories and exchanges are linked real time, demerged companies should get listed within a few days of stock going ex-date.

Sebi should act now in the interests of the minority shareholders.