Delisting May Lead To Governance Issues In Companies Says Fitch

Mumbai, June 11: Concentration of ownership after delisting may create governance and key-man issues at the companies adopting such strategies, ratings agency Fitch warned on Thursday.

Corporates can also simplify or reorganise complex group structures without the interference of minority shareholders through such moves, the agency noted.

Anil Agarwal-led Vedanta Resources and HT Global IT Solutions Holdings have announced delisting of their Indian subsidiaries – Vedanta and Hexaware Technologies, respectively - amid a slump in share prices and easing of delisting norms in the recent past, while Gautam Adani-led Adani Power is also mulling a similar move of promoter buying out shares.

"A  highly concentrated shareholding could increase governance and key-man risks,” Fitch said in its note.

From a ratings perspective, it said the credit impact of such moves will be largely driven by their funding and capital structures post-privatisation and the effects these will have on the linkages between various entities in the groups and cash flow access.

Completion of a delisting is subject to the final price and the ability of the parent to raise sufficient financing, but the privatisation and resultant increase in control by the parent will strengthen its linkages with the subsidiary, giving it better access to the subsidiary's cash flows, the agency said.

The funding source used by the parent to purchase shares in the subsidiary will determine the group's post-privatisation capital structure and also the financial profile of the group, it said.

Lower dividend payouts to minority shareholders may help the financial profile of a group, but the additional debt incurred for the buyback and the interest servicing may negate the benefit, it said.

The agency said HT Global's management expects to finance the privatisation of Hexaware largely through an equity infusion from its parent Baring Private Equity Asia, which would improve HT Global's leverage and financial flexibility for refinancing the secured notes due July 14, 2021.

In the case of Vedanta, Fitch said it expects the parent to fund its delisting through debt, which will increase the group's leverage. “The increase in leverage could be offset by cash savings from lower dividend payments to minorities and greater efficiency through a simplified group structure,” it added.