Essar Delisting, 2007

In January 2007, Essar Steel announced delisting of its shares from NSE and BSE. Essar Steel
Holdings Ltd, the parent company and largest shareholder of Essar Steel, sought delisting from
the Bombay Stock Exchange and National Stock Exchange. 

According to statements issued by the company, “The delisting of equity shares will offer more
flexibility in operations and management of the company, greater efficiencies and provide an
exit opportunity for shareholders.”

Essar Steel Holdings, a Mauritius-based subsidiary of Essar Global Ltd and largest shareholder
as well as promoter of the soon-to-be-delisted entity. It followed the voluntary delisting method.
After obtaining the consent of the Board and shareholders, a public announcement was made as
per SEBI's delisting guidelines and the exit price to be paid to shareholders was determined at
Rs 48 by the reverse book building process.

Why did they delist?

A number of reasons, both external and internal, have been attributed to companies’ decision to
delist from the bourses. A major reason for the delisting phenomenon has been attributed to
regulatory relaxations. Other reasons cited for delisting included companies’ desire to avoid
scrutiny of shareholders, regulators and potential investors, and also avoid payment of
exorbitant compliance costs associated therewith. Irrespective of the reasons behind it,
delisting of companies has several stark implications for the company as well as its
shareholders. Delisting is a prelude to going private and hence prevents its shareholders from
participating from the future growth of the company.

One of the reasons for the delisting that can be implied is that Essar wanted to delist all its
shares from domestic bourses and then list them globally as it wants to become an International
Business House. As it has been seen in recent times that Essar Energy has been listed in the LSE
and it provides sufficient proof to the above stated point.

How did they Delist?

The Promoter stake was at 87%. The minority shareholders of Essar Steel Limited had two
options. They could choose to surrender their shares to Essar Steel Holdings Limited for Rs. 48
per share or they could choose to hold on to the shares of Essar Steel Limited, which will be
delisted and hence not traded on the stock exchanges. The risk with choosing the latter option
was the lack of liquidity after delisting. Shareholders might not be able to sell the shares of Essar
Steel Limited at all and may be struck with them for eternity. However, these shareholders will
continue to enjoy all shareholder rights such as voting rights and right to receive dividend along
with other benefits arising from various corporate actions of Essar Steel Limited.

On announcement of the delisting, the shareholders were unhappy and protested against the
successful delisting to be carried out. In spite of the protests, Essar Steel Ltd. went ahead with
the delisting.  In the run up to delisting, the promoters’ anti-investor actions had seen their
shareholding increase from 34% to a massive 87%. This led to a skewed delisting process that
ensured a discovered price of a low Rs48, although it was Rs10 higher than the floor price of
Rs38. After a stay order against the delisting was vacated, another investor’s appeal to the
Securities Appellate Tribunal (SAT) was posted for hearing, but that too had no impact on the
suspension of trading.

The investors of Essar Steel feel that they have been treated unfairly. In 1992, Essar Steel shares
were being traded at Rs150. As its fortunes slid, the company made two rights issues at Rs60. In
2006, as part of capital restructuring, it reduced every 100 shares owned by an investor to 60.
This means that investors actually paid Rs100 per share for the rights issues. After Essar Steel
converted its GDRs, it dumped its retail investors by offering them a meagre Rs48 per share,
when all steel companies were quoting at record highs and its integrated steel plant was doing
well and the company was making profits.

Initially Essar was betting on an amendment to the reverse-delisting rules that would take away
minority investors’ power to dictate the exit price. Since this amendment was shot down by the
SEBi board Essar looked for other alternatives. The promoters converted the global depository
receipts (GDRs), which were being collected when the company was in the doldrums. This
would take the promoters’ holding to over 90%, thus allowing them to delist without an open
offer.

The buying back of shares can be said to be a part of a long term strategy. The delisting was
done in the year 2007 in which the market was a bear market. This was a good time to buy back
shares. This could have been a strategic move by the company to delist at the right time so that
the exit price could not have been too high.

During that time there were rumours that the Ministry had persuaded the National Mineral
Development Corporation (NMDC) to hand over Bailadila Deposit 3 mines to Essar Steel Ltd.
The Bailadila complex in the Bastar region possesses one of the world’s best grade of ore which
is sulphur free and has over 66 per cent iron content. There were a lot of apprehensions
whether the exit prices would reflect these acquisitions or not. But as seen these acquisitions
were not reflected in the exit price.

Post Delisting

The company went on an acquisition spree after delisting in 2007. They acquired three mines in
Bailadila from the National Mineral Development Corporation. Apart from acquiring these
mines, Essar Steel went ahead and acquired Canada based Algoma Steel and a steel facility in
Minnesota, USA. These acquisitions were done immediately after announcing the delisting. The
company later went on to integrate its forward and backward processes both in the domestic as
well as international market. The delisting has proved to be one of the major milestones in the
growth of the company.