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Thursday, December 17, 2015

The Essar Oil Delisting – What To Do Next If You Are a Shareholder

Essar Oil is the second largest Non-Government owned Oil Refiner of India. Recently, the company announced that it is currently in discussion with the Russian Oil Giant – Rosneft wherein Rosneft will acquire a 49% stake in the company. Accordingly, they want to delist their shares from the local bourses. Delisting is the situation wherein the shares of the company involved will no longer be bought or sold in the stock exchange. 

So, if you are one of the shareholders of Essar Oil – Please read this article without fail. If you know someone who owns shares of Essar Oil – forward this article to them so they can benefit. Even if you don’t own shares of Essar Oil or know someone who does, you can still read this article to understand what exactly happens when Delisting happens for a listed company because in future, one of the company’s you have invested in, could Delist…

So, Whats Happening Here?

The Russian Oil Giant Rosneft is acquiring a 49% stake in the company. Essar Oil currently is listed in the Indian Stock Market with the promoters & global depository participants holding almost 90% of the total equity paid up capital. The remaining outstanding shares amounts to about 14.2 crore shares. Due Diligence exercise for this acquisition transaction is currently underway.

As part of this acquisition by Rosneft, the promoters of Essar Oil are currently acquiring this balance shares from the public by a Reverse Book Building route. On December 30th 2015, the Discovered Price of offer and its decision to Accept or Reject the offer would be declared by the Promoters. If the Promoters accept the offer, the price will be shared with the Shareholders.


  • Bid Open Date: 15 December 2015
  • Bid Close Date: 21 December 2015
  • Floor Price of the Offer: Rs. 146.1 per share

This basically means that, if you subscribe for this delisting, you are going to get either 146.1 or the offer price as discovered by the reverse book building process – whichever higher.

What is SEBI’s Say on This?

SEBI understands that there are potentially lakhs of investors across India that may be impacted due to this delisting. The company may also compromise investor interest by offering a lower price to the investor and make a profit at their expense.

So, they have instructed the Promoters of the Company as follows:

They have to Pay the Difference (if any) between the Transaction Price received from Rosneft and the Delisting price paid to the public shareholders whose equity shares are being accepted under this delisting offer.
This way, SEBI is trying to Safeguard Investor Interest which is basically part of their Job Description, isn’t it?


A Little Bit about Rosneft - The Buyer

Rosneft is probably the largest publicly traded petroleum company in the world. The best part is, the Russian Government owns a 69.5% stake in this company. The Petroleum Major BP owns a 19.75% stake in Rosneft and the remaining 10.75% is traded publicly.

So what are the Investors Options?

Investors basically have 3 options:

  1. Subscribe to this Delisting Offer
  2. Sell the Shares in the Market – NOW
  3. Sell the Shares to the Promoters up until a Period of 1 year from the date of Delisting


Lets Review these options – Shall We?

Before we start reviewing these options, we need to understand the tax liability on the sale proceeds. As per the Prevailing Tax Laws, If you sell a share via a recognized Stock Exchange after paying the Securities Transaction Tax (STT), the taxation is as follows:
  • If the shares were held for more than a year, the tax is 0
  • If the shares were held for less than a year, the tax is 15% of the capital gains

If you sell shares outside the exchange, the taxation is as follows:
  • If the shares were held for more than a year, the tax rate is 20% of the Indexed Capital Gains
  • If the shares were held for less than a year, the capital gains are added to your net taxable income and taxed per the tax rate applicable to you.


So, here – Options 1 & 2 would be considered selling via an organized exchange while option 3 would be considered selling outside the exchange.

Option 1: Subscribe to the Delisting Offer

This is the straight forward option – just subscribe to the promoters Delisting Offer. Once Delisting is confirmed and they accept the book building price, you will get your money. Plus if the price paid by Rosneft is higher than the delisting offer price, the promoters have to share that profit with you as well.

Option 2: Sell the Shares to the Promoters after Delisting

Not everyone is always informed of the stock market developments. Some people may be out of town/country or due to some reason and unable to subscribe to the Delisting offer. So, to help such people, SEBI has mandated that any company that gets delisted should give an option for investors to sell their shares to the promoters for a period of up to 1 year at the Delisting Price.

So, even if you cannot subscribe to the Delisting offer now, whatever is the Delisting Price, you can get that for a period of up to 1 year after Delisting.

Option 3: Sell in the Market – NOW

This is an option you always have with any share you own. You can sell your share in the open market as long as the share is traded and get the transaction price. Since the share isn’t delisted yet, you can exercise this option if you want. However, the point here is – the capital gains arising out of the sale will be taxed as per the prevailing tax laws.

Which Option Gets My Vote?

After Reviewing these 3 options, you are probably wondering what’s my take on this.

Option 1 – Subscribing to the Delisting Offer is for the Investor who doesn’t need the money right now and is willing to wait & watch to see how things play out. Plus if the price at which Essar Oil shares are acquired by Rosneft are higher than this, the promoters will also compensate the Investors for this. So, this is definitely a “Good & Safe” Option.

Option 2 – Selling during the Exit Window is for the Investor who basically missed the bus and did not realize his shares got delisted. Though the Taxation aspects are not favorable, you can still get a decent price for your shares. So, this would be your “Worst Case Scenario” Option

Option 3 – Selling in the Market Now is what I would recommend right now because of the following reasons:
  • Delisting is always an uncertain process. The whole share buy-back through reverse book building is subject to approval by the promoters. You never know whether they will accept the offer.
  • The stock is currently trading @ Rs. 220 per share (as of End of Trading on 16th Dec) and is expected to trade at around this number in the near future.
  • The discovered price is not expected to be much higher than the current market price. In fact, Market Experts feel the most likely price would be around the Rs. 190 - 200 mark.
  • Tax Treatment wise, selling now or subscribing to the offer price are the same. The chances of making a better profit now are higher than waiting for the Delisting to Happen.

So, I think Option 3 is better than Option 1.

Note: If you are someone who bought shares of Essar Oil last year during the last week of December, Option 1 will be better because selling in the open market now would attract short term capital gains tax @ 15% while if you wait and subscribe to the Delisting offer, you would’ve finished 1 year and would have 0 capital gains tax.

Some Last Words

Share Delisting usually causes a lot of speculation and interest in the market and there can be short term spikes in prices. The price of Essar Oil stocks have increased in the last couple of days and will most probably continue until the decision is made by the buyer company. However, even if some sort of bad news spills out, share price tank and tank hard.

So, I would recommend you choose between Options 1 or 3 and decide on whichever suits you Best.

Happy Delisting!!












Disclaimer: The Author does not hold any shares of Essar Oil. This review is based on his current assessment of the company's stock and the Acquisition situation. Please think carefully before deciding what to do with the shares of Essar Oil that you hold. The Author will not be liable for any losses arising out of your decision to sell or not sell the shares you own. 

4 comments:

  1. Hi, if I missed the bid closing date what options do I have.

    ReplyDelete
  2. Hi, What will happen if someone is not exiting in the delisting period of one year?
    Thanks in Advance

    ReplyDelete
    Replies
    1. You can contact company management to see if they are still ready to buy back the shares. If they refuse am afraid there aren't many options available

      Delete

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