Adani group is in the news again. In staggered fall in Adani Enterprises Limited (Adani) share price on 3rd June 2015 due to the effect of demerger in the price has again invited SEBI to rethink on its price discovery mechanism. Adani’s share price had fallen by about 82.5% to 111.25 from its previous day closing price of about 635.70 per share. Let us try to understand price discovery mechanism for the demerger.
In demerger/spin-off company transfer its one or more business to other entity (Resulting Company). Shareholders of demerged company (Existing Company) will get additional shares of resulting entity in which business/businesses are getting transferred in addition to existing shares in the demerged company. As business getting transferred, the value of shares of existing company decreases as it gets adjusted to the value of remaining business. However the value of the share of resulting company increases to the extent decrease in prices of existing company. Hence ideally immediately after demerger shareholders are to be at no gain no loss situation.
THE ROLLER COASTER DAY
Adani Enterprises had fixed 4 June 2015 as the record date for the purpose of the demerger, which means shareholders whose name appears in the register of members of the company on that date (June 4) will be allotted shares of the various companies as per the restructuring. Those who have bought the shares 3rd and 4th will not be able to see their name on the register, on account of the two-day settlement period, and will not be able to avail of the benefit of the split.
Price discovery of Adani Enterprises Ltd.’s shares after its demerger turned out to be a messy affair. Investor valued remaining business of Adani at 80% of its value immediately before demerger. So ideally on 3rd June 2015, the stock should have been opened at 80% below its immediate previous trading day closing price. However, actually, the shares weren’t allowed to correct in one go.
IMPACT ON INVESTORS
After opening share at above Rs. 573 levels, the share price gives the impression that it is already trading at an ex-split price. Now some clueless investors who bought the stock in a misconception that stock had fallen temporarily, bought the stock at a whooping price which cannot be retouched by AEL, at least in next few years. According to a trading member, 17,500 shares were bought at the Rs. 573.3 levels. If the shares were, instead, allowed to correct in one go, the damage to such investors would have been contained at much lower levels. The Investors’ Grievances Forum filed a complaint with SEBI alleging that the trading of the demerged shares of AEL was not done with the adjusted price.
As correctly said Necessity is the mother of all the inventions, after Adani issue, a need has arrived for SEBI to rejig the pricing discovery methodology. SEBI decided to have 45 minutes cooling period post-Adani episode for Mastek. However we believe that more solid safeguard is required .There should be some mechanism which will discount all the material events in stock prices appropriately. Options in our view can be the following:-
- To mandate special call auctions transactions on the first day
- Trade to trade for five trading sessions thereafter
- Simultaneous listing of both demerged and resulting company
There should be some flash/alert on Stock as soon as broker wants to enter into the transaction for that stock for say 20 days.
Our objective is only that SEBI which relentlessly tries to make/amend exchange rules investor friendly should consider this issue on a priority basis and the better idea should get implemented. This is little try from my side to explain how demerger process works in share prices and what can be done in future to streamline this process further.
[For further details on Mastek & Adani Enterprises Limited demerger please go through M&A Critique November 2014 & March 2015 issue respectively]
Main Contributor : Aishwarya