Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Reliance Demerger as Backdoor Delisting

I wrote an

article
in today’s Financial Express about the Reliance
demerger.

In January 2006, Reliance Industries Limited demerged four companies
accounting for about a quarter of its market capitalization.
The delay in listing these new companies means that
about a quarter of the original company (representing a market value of
over $7 billion) have been effectively delisted since January 18, 2006.

This has three consequences

  1. Millions of shareholders in these companies cannot trade
    these shares.
  2. The corporate governance provisions regarding independent
    directors and investor protection do not apply to these companies.
  3. These companies are under no obligation to provide the continuing
    material event disclosures to the exchange that a listed company is
    required to provide.

The result is that a company with a million shareholders is subject
only to the disclosure and governance regime that applies to a
mom and pop company with a dozen shareholders.

I argue that the exchanges and the regulator should not look at
the listing of the demerged companies through the framework
of initial public offerings that are obviously designed
to make it difficult for a company to list. Rather they should use
the framework of the delisting guidelines which are designed to make
it difficult for a company to delist. The situation in a demerger or
delisting is that the public has already put in its money and the
regulator’s priority is to ensure that the company does not
slip away from the clutches of the listing regulations.

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