Despite the changes made to the SEBI Takeover Regulations in 2021, there is still a pressing need to update the current delisting process. Many delisting deals fail due to outdated requirements that are still mandatory. A smooth listing and delisting process is essential for maintaining the stability and integrity of the Indian securities market. Also there are valid commercial reasons why a company should be delisted, and it is not in the best interest of public shareholders to force companies to remain listed, especially if there is little to no trading in their securities or if their business no longer justifies continued listing. Despite the changes made to the SEBI Takeover Regulations in 2021, there is still a pressing need to update the current delisting process. Many delisting deals fail due to outdated requirements that are still mandatory.
Now, the SEBI will release a discussion paper on this subject by December 2023, seeking comments and inputs from stakeholders and market participants.
To control the manipulation of shares of a company that has chosen a delisting option from the stock exchanges, the capital market regulator, the Securities Exchange Board of India (SEBI), is appraising delisting rules and regulations for listed companies. The chairperson of the SEBI, Madhabi Puri Buch declared on July 24, 2023, that the governing body will release a discussion paper on this subject by December 2023, seeking comments and inputs from stakeholders and market participants.
Delisting refers to eliminating the securities of a listed company from a stock exchange. Once delisted, the securities of that company can no longer be traded on the stock exchange. Delisting can be either voluntary or compulsory. In voluntary delisting, a company decides to eliminate its securities from the stock exchange. In compulsory delisting, they are eliminated as a punitive measure for the company not making submissions or complying with conditions laid out in the listing agreement within the stipulated timeframes. If a company wants to delist its securities, it must buy back 90% of the total issued shares.
The SEBI is exploring the plan of allowing companies to get delisted through a fixed price system instead of the current reverse book-building process. Currently, delisting a company from the stock exchange involves a reverse book-building process. This process involves shareholders of the company offering to sell their securities back to the promoters or large shareholders who have significant influence over the company’s plans and policies. A delisting price is then calculated based on these offers. However, the SEBI has expressed concerns about possible manipulations in this process. To address these concerns, the SEBI is considering a new method that would allow a promoter to offer a fixed price for delisting, and shareholders would have the choice to accept or decline the offer. This fixed price system is aimed at offering a transparent and honest process for delisting, reducing the potential for manipulation, and ensuring fair treatment of all shareholders.
The question at hand is how a fixed price method will benefit shareholders. However, the benefits of this method can only be determined once SEBI announces the formula for coming up with a fixed price. Although this approach may address some current issues, its effectiveness will depend on the actual formula used. In addition to determining the price, promoters must also obtain minority shareholder consent and reach 90% shareholding to delist successfully. To simplify the process, a holistic evaluation of all aspects, not just the price, is needed. As always, the devil is in the details. If a fixed price offer with a floor price specification replaces price discovery, the method must be robust enough to prevent disputes over valuation or determination of the floor price.
SEBI has to walk the Tightrope
The SEBI’s sturdy ground for modifying delisting standards is the second such attempt in the last couple of years. The preceding consultation paper in July 2021 encountered opposition from many quarters. At that juncture, the suggestions included permitting the acquirer to launch open offers and delisting offers concurrently at different prices, a condition of only 51% of minority shareholders’ permission for special delisting resolution instead of 66%, and a fixed higher price concept to be paid by the acquirer. Many investors argued against these suggestions, stating the reverse book-building (RBB) procedure that permits the discovery of price should not be discarded, and delisting and open offers should be kept separate.
While the market regulator has planned to come out with another paper in December 2023, the regulator has hinted at giving two or three choices to companies to delist. The company can offer delisting at a fixed price and explore RBB. If even RBB does not succeed, the company may be given extra time to come up with a solution. The contention that promoters should be capable to delist without feeling like ‘Abhimanyu’ is strong. Simultaneously, minority shareholders looking for a fair price for their holdings cannot be dismissed as ‘mischief’ or ‘shareholder activism’. The challenge is to balance the two.
In that background, the existing rules do seem rigorous. For one, companies have to get permission from 66% of shareholders to pass the special delisting resolution, which is rigid. But the actual deal breaker is the decree that any delisting can be successful only if it manages to obtain 90% of the shares in the company. There are allegations from promoters that savvy market traders collaborate and jointly acquire more than a 10% share in the company and then claim a superior offer price from the company. And sometimes, the demand can be outlandish. There is also a contention that because of the 90% limit if the 10% shareholders demand a very high price, compelling the acquirer to withdraw. The bigger public shareholder base, who had offered their shares at a fair price and sought a possible exit from the company, suffer.
Many promoters face the embarrassment of not being able to even cross the special delisting resolution phase as the majority of minority shareholders vote against it despite having more than 70% stake. Thus, the contention that if one has the liberty to list a company, the liberty to delist should also exist, holds water. Supporters of this theory trust that RBB is the major barrier to this liberty. At the same time, the SEBI has to safeguard the retail investor’s welfare too. There have been instances where the promoters have offered a very low price and thankfully were not capable to finish the delisting because investors did not tender the shares. Therefore, opponents say that RBB is a safety net for retail investors. For the market regulator, it will be a difficult test. Keeping promoters and investors happy at the same time will be tough. But decreasing the 90% limit to say, 75%, or decreasing the percentage condition for special delisting resolution to pass might be a decent solution.
Additionally, if a merger or acquisition deal is materialized after a successful delisting and the price offered is higher than the delisting price, the acquirer must pay the difference to public shareholders. However, due to the lack of clear time limits or specific guidelines, this creates confusion for parties considering M&A transactions involving delisted companies. To address this, SEBI could establish a six-month timeframe following successful delisting. If an M&A transaction is proposed during this period with a price higher than the delisting price, the acquirer would be required to pay the differential amount to public shareholders.
To conclude, despite the changes made to the SEBI Takeover Regulations in 2021, there is still a pressing need to update the current delisting process. Many delisting deals fail due to outdated requirements that are still mandatory. If we want to promote an “ease of doing business” environment in our country, it is crucial to ensure that deals can be easily made. Lawmakers must acknowledge that there are valid commercial reasons why a company should be delisted, and it is not in the best interest of public shareholders to force companies to remain listed, especially if there is little to no trading in their securities or if their business no longer justifies continued listing. A smooth listing and delisting process is essential for maintaining the stability and integrity of the Indian securities market.
