SEBI notifies Delisting Regulations 2009 – old but matured wine in a new bottle

SEBI has notified Regulations for delisting of equity shares (available here). While I will post a more detailed article over the weekend, some quick comments follow.

Delisting of equity shares is without any doubt a sensitive and controversial issue. A listed company may have several valid reasons for delisting its equity shares. However, even a whisper of delisting is often found sufficient to adversely affect the market price (though, at times, the price also moves upward if the offer price for delisting is expected to be higher than ruling market price). Delisting obviously affects seriously – even fatally – the liquidity of the shares. The issue also is not merely of liquidity but even fair price of the shares for the exit offer to public shareholders. By definition, and as per sound rules of valuation of shares, the value of the shares of a listed company are higher –the thumb rule is 33% – than that of the value of the shares of an unlisted company. To put in other words, the value of the  same shares change significantly once the listing tag is removed.

SEBI has been, I think, unable to address the issue of delisting in a satisfactory way despite repeated attempts and after adopting different techniques. The problem of delisting goes together with the related problem having minimum public shareholding which also remains largely unaddressed.

The new Regulations come into immediate effect. They replace the SEBI Delisting Guidelines of 2003 but continuity is ensured by a transitional provision.

The dominant role of Promoter in listed companies in India is recognized and thus for delisting, it is the Promoters who have to make an offer to the public shareholders to buy out their shares. This may sound appropriate considering the dominant role of Promoters in India but is also absurd if one sees from another angle. When a Company gets listed, usually (except, e.g., there is an offer for sale), it is the Company that receives the monies for the shares issued. But, for delisting, it is the Promoters who are required to arrange for money to buy out the shares of the public. Consider an example. A Company having a capital of Rs. 75 crores makes a public issue of Rs. 25 crores. Let us say 5 years later, the Company proposes to delist the shares and the public shareholding continues to be 25%. The most logical step is that 25% of the value in the Company should be returned to the public shareholders through the Company itself. But, no, this is not permitted. It is the Promoters who have to find, outside the Company, such amount and pay to the shareholders. To remove even the slightest of doubts, Regulation 4(4) provides that the Promoter shall not use the funds of the listed company directly or indirectly to give the required exit opportunity to public shareholders. Buyback of shares is also a prohibited route for delisting.

One concern relating to obtaining of approval for voluntary delisting (with an exit opportunity) has been addressed in an interesting way. The delisting proposal is now required to be be approved by a special resolution through the postal ballot route. However, in such postal ballot, the votes cast by public shareholders FOR the resolutions should be at least TWO TIMES  the votes AGAINST the resolution.

For the exit opportunity, the Promoter has to open an escrow account. However, importantly, the whole of the estimated amount of consideration payable for the full exit offer needs to be deposited in this account. Considering the long period of the exit offer, particularly where some shareholders typically do not participate in the first round, a fairly large sum of money would get blocked. However, bank guarantee is also permitted in addition to cash.

The new Regulations continue to fail to address the issue of giving a fair price to the shareholders for the exit though some small steps are taken in the direction. Essentially, delisting often is at a price which is already driven down by fears of delisting and impending illiquidity. While the Regulations do provide for taking past average price into account – similar to formula under the Takeover Regulations and preferential issue of shares, they still fail to address the basic issue. But more on this later.

A new complicated formula has been provided to calculate whether the offers received from the public for the exit are sufficient to permit delisting. However, those who have not offered their shares have the assurance of being given a second chance to exit.

Interestingly, a special chapter has been provided for “small companies” (defined as those whose paid up capital is upto Rs. 1 crore) whose shares are illiquid (also as defined) and their shares can be delisted through a special fast track route.

The issue of delisting is complex and has no easy comprehensive solution. The new Regulations make only incremental improvements without a quantum leap addressing some core issues.

–       Jayant Thakur