Recently, the Securities Exchange Board of India (SEBI), the Indian capital market regulator, made overhauling amendments to the SEBI (Delisting of Equity Shares) Regulation, 2009 (Delisting Regulations) to ease the delisting process. Furthermore, certain amendments were made to SEBI (Substantial Acquisition of Shares and Takeover) Regulation, 2011 (Takeover Regulations) and SEBI (Buy Back of Securities) Regulation, 1998 (Buyback Regulations) to facilitate takeovers and buy-back of shares by companies.
The overall delisting activity has gone down considerably a total of only 38 offers were made during 2009–2014 of which only 29 succeeded, which indicates a 24% failure ratio. Among nine unsuccessful offers, the number of shares tendered in case of seven offers, was less than the number required under the Delisting Regulations. In the remaining two offers, acquirer rejected the discovered price. Out of 38 cases, in 11 cases the price differential of discovered/exit price over and above the floor price was more than 100%. Market participants have pointed out issues in the delisting process both in the cases where the delisting offer has succeeded or failed. In case of successful delisting offers, a few market participants have apprehended that the success of the offer was due to tacit understanding between promoter(s) and a set of investors. Similarly, when the delisting offer fails, a few market participants have raised concerns that the discovered price through reverse book building process has been unduly influenced by a set of investors who are mainly speculators.
Some of the notable amendments are discussed below:
Use of stock exchange platform for tendering shares
A major common amendment has been made to all three Regulations to facilitate tendering of shares by shareholders and settlement of the same through the stock exchange mechanism. Following this amendment, the transfer of shares by shareholders under this new mechanism in case of takeover offer/delisting offer/buy-back will enjoy favorable capital gains tax treatment as currently available to on exchange transactions. This was one of the major causes of failure of many offers in past. However, with this amendment, one may see more participation from shareholders in takeover offer/delisting offer/buy-back
Joint framework of the Delisting Regulations with the Takeover Regulations
An option has been granted to acquirer pursuant to triggering Takeover Regulations (except in case of competing offer) to directly delist the shares of a company through Delisting Regulations, instead of making offer under Takeover Regulations. Earlier, under the Takeover Regulations, the acquirer cannot go beyond the 75% limit, i.e., minimum public shareholding of 25% needs to be maintained.
Change in the threshold limit for successful delisting
Under Delisting Regulations, a delisting offer is considered successful if following the offer, shareholding of promoters is higher of (a) 90% of total shares, or (b) aggregate percentage of promoter’s pre-offer shareholding and 50% of the offer size. Now, Delisting Regulations have been amended to consider delisting successful when promoters shareholding reaches 90% of the total issued shares of the company, provided at least 25% of public shareholders holding shares in demat form should have participated in the Reverse Book Building (RBB) process. However, considering that public participation in the past has been in the range of 5%–10%, the additional requirement of 25% was subsequently diluted by providing that it will not apply where the acquirer and merchant banker are able to demonstrate that they have delivered the offer letter to all public shareholders either through registered/speed post/courier/hand delivery/e-mail etc.
Doing away with the 50% condition is a welcome move, which anyways had become redundant due to most of companies now meeting the 75% threshold for promoter’s holding. The dilution of 25% requirement still leaves some room for large public holders to dominate the delisting process.
Determination of the price
Under Delisting Regulations, the final price (price at which the promoter/acquirer was required to provide exit to other shareholders pursuant to delisting) was the price at which maximum number of shares were tendered under the RBB process. The amended regulation now provides that the final price will be the price at which the shareholding of the promoter/acquirer (along with persons acting in concert), after including shareholding of public shareholders reaches the prescribed threshold of 90%. In the new approach, the bid of each shareholder would count unlike the earlier system where only the bid of the largest shareholder could make a difference.
Increased burden on board of directors and merchant bankers
Merchant bankers are now required to carry out due diligence of on-market and off-market transactions of top-25 shareholders of the company for the past two years and submit their report to the board of directors. Based on which, the board of directors, while approving the proposal for delisting, needs to certify that:
- The company is in compliance with applicable provisions of securities laws.
- The acquirer or promoter or promoter group or their related entities, are in compliance with Regulation 4(5), i.e., they have not employed any device, scheme, artifice, fraud, deceit, manipulation to facilitate delisting.
- The delisting is in the interest of shareholders.
With this amendment, SEBI had shifted some onus of investigating manipulative activities on the board of directors and merchant bankers. It has to be seen, how comfortable any merchant banker will be while issuing above stated reports and what reasons the board of directors will give to state that the delisting is in the interest of shareholders.
- Promoters cannot propose delisting of equity shares of a company, if any entity belonging to the promoter group has sold equity shares of the company during a period of six months prior to the date of the board meeting approving delisting proposal. These amendments have been made to address potential abuse of the process by promoters by parking shares with friendly investors prior to delisting and thereby side-stepping the price discovery mechanism. However, it is not sure if the window of six months will really provide a good enough safeguard as decisions such as delisting are planned much in advance.
- Through a series of amendments, timelines for entire delisting process has been reduced from around 117 working days to around 76 working days.
These amendments made by SEBI to the delisting, takeover and buyback regulations can be considered to be a move in the right direction as they endeavor to address the concerns of both sides — promoters and minority shareholders. Nevertheless, there are still some areas, which may need a relook e.g., onerous obligations on board of directors and merchant bankers, minimum participation of public shareholders, etc. These amendments to the Delisting Regulations, coupled with the proposed provision under the Companies Act, 2013 in relation to minority squeeze-out could enable many companies including multinationals to privatize their business in India. Amendments to Takeover Regulation will have a positive impact on M&A transactions involving listed entities.
 Source: SEBI Discussion Paper – Review Of Delisting Regulations, 9 May 2014.