Page 104 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 3: Introduction to Security Analysis

Notes
markets provided MNCs with complete control over their Indian ventures, allowed them
to repatriate profits and make more independent investment decisions.
A section of investors felt that government regulations must have provided them with a
choice. However, minority shareholders claimed that they had no option and were forced
to sell their shares once MNCs bought back shares from the majority shareholders. For
example, because Life Insurance Corporation (LIC) and the General Insurance Corporation
(GIC), who together held a 21% stake in Philips, surrendered their shares when Philips
made its first buyback offer, the minority shareholders were forced to surrender the
remaining shares when Philips made a second offer in November 2001. Reportedly,
investors feared losing an exit option in case the shares get delisted. Moreover, during the
second offer, the trading volume of shares fell to less than (on an average) 500 shares per
day since December 2001.
Similarly, when Cadbury made a buyback offer, public shareholding fell from 26.67% to
just 7.32% within six months after the majority shareholders surrendered their shares.
Moreover, in this case, investors felt that the premium offered by Cadbury Schweppes, the
UK based parent company of Cadbury, was low. The offer was priced at 500, which
represented a premium of 24% on the average high and low prices over the past 26 weeks
prior to the offer. However, Cadbury’s stock had been trading at prices in excess of 500
in 1999 and 2000, with an average P/E multiple of 60 in 1999 and 54 in March 2000.
Moreover, Cadbury’s third quarter (October to December 2001) sales had increased by
11.2% compared to the same period in 2000, while its profits had increased by 5.2%. Hence,
investors felt that the price offered for the buyback had not taken into consideration the
future potential profits of the company and was not attractive to shareholders who had
been holding their shares for a longer term.
As a result of depressed stock market conditions, investors (in most cases) received a low
buyback price. The price at which the open offers were made by MNCs caused great
concern to both investors and regulators.
Analysts argued that like China and Indonesia, India must revert back to a system that
prevented multinationals from delisting their shares from the stock exchange by
prescribing a minimum amount of floating stock. The buyback by MNCs not only affected
the small shareholders, it also had an impact on the stock exchanges. The buyback of
floating stock resulted in a decline in the trading volumes. For example, the Delhi Stock
Exchange was badly affected as MNCs accounted for more than 90% of the volume traded
and 85% of the listing fees earned by the exchange before the buyback act was introduced.
Given the negative impact of the Buyback Act, market observers felt that the act had failed
to revive the capital markets.

The dilemma that faced small investors in India was whether the buyback option, along
with the SEBI guidelines, actually protected their interests and offered them an exit option
at a fair price or was it a tool that provided them with no options allowing large MNCs to
gain complete control of their subsidiaries.
Investors felt that the regulations framed by SEBI did not have provisions for preventing
good stocks from delisting. Moreover, the buyback price, which was determined using
the parameters specified in the SEBI Takeover Code, did not consider the future potential
of the stock (Refer Exhibit III for details of pricing parameters of open offers). They felt
that SEBI should have looked at various financial parameters such as future cash flows,
value of brands and the value of fixed assets to determine a pricing formula for open offers
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