Proposal to Overhaul Delisting Regime

Delisting of companies from the
stock exchange (also known as privatization) has become a common phenomenon around
the world, as it has in India. The rationale for delisting a company is
detailed below:
A number of
reasons are proffered as motivations for delisting. Where there is a perception
that the market price of the company is not reflective of the true value of its
businesses, share price may cease to be an accurate indicator of the company’s
worth. By privatising the company, the target and its management obtain greater
flexibility in managing the business of the company without being dictated by
market expectations, which can often be short-term in nature. In other words,
the management is free from market pressures. This flexibility would help in
responding to a more challenging business environment. Moreover, the
skyrocketing costs as well as management attention required to ensure
compliance with increasingly onerous securities laws and regulations as well as
listing standards compel managements and controlling shareholders to delist the
company so as to enable greater focus on the company’s business.[1]
For these and other reasons, the
Indian markets have witnessed delistings by controlling shareholders who are
either domestic promoters or multinational companies (MNCs). The spate of MNC
delistings have been occasioned also by the relaxation of sectoral caps under
the foreign direct investment norms whereby the MNC promoters are able to shore
up their holdings beyond restrictions that were previously placed that enable a
delisting of the Indian listed subsidiary.
At the same time, delisting can
also result in significant risk to minority shareholders. As observed in the
work referred to above: “A combination of factors conspires to provide undue
advantage to the target and its controlling shareholders. These include the
fact that the target and controlling shareholders can determine the time of
delisting, that they benefit from information asymmetry that operates in their
favour and that they are entirely in control of the process.” For example, the controlling
shareholder may be in a position to initiate a delisting when the share price
of the company is low. The company may also significant important projects or
developments until the delisting is completed so that the prospects from those
are not factored into the share price taken into account for the delisting.
The effort of regulations
pertaining to delisting must strike a delicate balance. On the one hand, it
must permit value-enhancing delistings that are beneficial to both the
promoters as well as the company, but on the other hand it must not result in
deprivation of value that the minority shareholders are otherwise entitled to
when they decide to exit from the company. The complexities involved in
formulating a regulatory regime for delisting is clearly evident from the
evolution of such a regime in India. Although specific regulation of delistings
in India is only over a decade old, it has been unsuccessful in achieving it
objective, due to which it is under a constant state of revision (with the
accompanying flux and lack of clarity or certainty). The first set of SEBI
(Delisting of Securities) Guidelines, 2003 was substituted by the SEBI
(Delisting of Equity Shares) Regulations, 2009. Even the relatively new
guidelines have not achieved the desired success, and hence the need has been
felt for a further review of the regime.
It is in this context that SEBI
earlier this month issued a Discussion
Paper on Review of Delisting Regulations
. The Discussion Paper seeks to
review the current state of affairs, identify the deficiencies in the delisting
regime and propose some suggestions for overhaul. It observes:
The overall
delisting activity has gone down considerably after the introduction of the
[2009] Regulations. A total of 38 offers have been made during the period
between the introduction of the said Regulations and March’ 2014. …
Out of the above 38
offers, 29 offers were successful. Amongst 9 unsuccessful offers, in case of 7
offers, the number of shares tendered were less than the number required under
the said Regulations. In the remaining 2 offers, acquirer rejected the
discovered price.
Out of 38
companies, discovered / exit price in case of 7 companies was equal to the
floor price. However, in case of 11 companies, premium in the discovered price
was more than 100%. Premium is the price differential of discovered/exit price
over and above the floor price.
Several difficulties have been
identified with the current regime, but here I discuss only two of the crucial
ones. The first is the use of the reverse bookbuilding mechanism (RBB) for
price discovery for the delisting, and the second is the considerably elongated
timeline that includes the need for shareholder approval through special
resolution.
Reverse Bookbuilding
Under the RBB process, the company
must fix a floor price, which is based on several financial and trading
parameters. Public shareholders are able to place their bids for sale of shares
in the delisting through an electronically linked transparent facility on the
stock exchange at or above the floor. The final bid price is determined as one
at which the maximum number of equity shares are tendered by the public shareholders.
However, the promoter/acquirer has the ability to either accept the offer at
that price or reject the same.
In the Discussion Paper, SEBI
identified several problems with the RBB process. Public shareholders holding a
significant stake can dictate terms as to the determination of the delisting
price and thereby hold the other shareholders to ransom. Since bids are placed
at a significant premium to the floor price giving rise to the likelihood of
their rejection by the promoters, the minority shareholders are denied a fair
exit. Moreover, the RBB process was found to be complex thereby resulting in
incomprehensibility on the part of the minority shareholders, especially of the
retail variety.
Due to this, SEBI has come out with
various suggestions, some of which relate to amending the RBB process to make
it more workable, with others that relate to doing away with that process
altogether by migrating to an alternative price discovery mechanism.
Suggestions: In my view,
there is merit in migrating from the RBB process (or a variant thereof) to
another more flexible price discovery mechanism. While the RBB provides
considerable power to the public shareholders, that power is capable of being usurped
by the more significant among such shareholders who hold a large number of
shares. Although it would be possible to make some adjustments to this
mechanism to avoid these distortions, they cannot be eliminated altogether. The
RBB process is rigid and inflexible, and any benefit of certainty and clarity
it provides is overshadowed by the restrictions it imposes in a successful
completion of the delisting offer.
Hence, the recommended option would
be for the promoters/acquirers to propose a bid price, which the public shareholders
may either accept or reject (by either tendering their shares in the delisting
offer or refraining from doing so). At first blush, this might seem to provide
too much leeway to the acquirers. But, that can be counteracted through other
protective measures, which are discussed below.
(i)        First,
if the price is too low, the public shareholders will not tender their shares
so as to not provide the minimum required acceptances to make the delisting
offer successful.
(ii)       Second,
the board of the target company must be foisted with the duty to advise the
shareholders as to whether the terms of the delisting offer are fair and
reasonable. In doing so, there must be a committee of independent directors
that provides the advice/recommendations. This is consistent with developments
such as the Companies Act, 2013 and the revised Clause 49, which impose greater
roles and responsibilities on independent directors, especially when the board
or promoters are afflicted with conflicts of interests such as in the case of
delisting.
(iii)      Third,
the committee of independent directors must obtain advice from an independent
financial adviser or valuer who provides an opinion as to the fairness and
reasonableness of the terms of the delisting offer. This would ensure the
review of the terms by an outside gatekeeper.
This approach of price discovery is
desirable as it is both flexible and protective. It is also consistent with the
approach followed for delistings in several developed jurisdictions. From a
comparative standpoint, the RBB process in India appears to be a rarity, and
SEBI must not continue to embrace it unless there are compelling reasons to do
so. If past experience is anything to go by, such a rationale for continuance
does not appear compelling.
Shareholder Approval
Under the current regime, delisting
can be allowed only if approved by way of a special resolution by the shareholders
through postal ballot. Further, the special resolution stands supported only if
the votes cast by public shareholders in favour of the proposal is at least
twice the number of votes cast against it. In other words, apart from a
standard special resolution, the proposal must enjoy the support of the public shareholders.
However, the Discussion Paper highlights a practical concern whereby this
requirement adds considerably to the timeline for delisting that takes away
from its effectiveness. Delistings are said to take anywhere between 4 and 6
months. One proposal is to do away with the shareholder approval requirement with
others suggestions making variations as to timing.
Suggestion: Despite the
concern on timing, the shareholder approval requirement is an important
protection to public/minority shareholders and ought not to be done away with.
As indicated earlier in this post, the public shareholders are vulnerable in a delisting,
as the process is orchestrated by the promoters/acquirers who are conferred a
natural advantage. Unlike a standard takeover offer (which does not require
shareholder approval), the delisting will result in illiquidity of the shares
of the target company. Before public shareholders have been deprived of such
liquidity on their shares (which does not occur in a standard takeover offer),
their consent must be obtained. The additional approval through a requisite
majority of public shareholders is also an important one that must be retained
because the promoters/acquirers are interested in a delisting due to which
their vote must be discounted. What is required is an approval through a
“majority of the minority” vote, which is now a recognised concept under the
Companies Act, 2013 (e.g. for material related party transactions).
Conclusion
The Discussion Paper also makes a
number of other suggestions that relate to the process of delisting, disclosure
requirements, eligibility, etc., which are not capable of being discussed
within the confines of a blog post. However, one issue that is conspicuous by
its absence in the Discussion Paper relates to the interplay between the SEBI
Delisting Regulations and the SEBI Takeover Regulations. Currently, there
appear to be difficulties in undertaking a takeover offer that would be followed
by a delisting in case of requisite acceptances that reduce the public
shareholding below the minimum. Although SEBI had been providing indications
that the asymmetry between the two sets of regulations will be ironed out in
due course, no concrete proposal has been forthcoming in that regard.

In
all, the effort to overhaul the delisting regulations is an important and
timely one. Given the spate of delistings that have been attempted in India
(and more that may perhaps ensue in the near future), it is necessary to
provide for a regime that efficient, timely and carries the necessary clarity
and certainty for the promoters/acquirers, but also one that sufficiently
protects the interests of the public shareholders.


[1]
Wan Wai Yee & Umakanth Varottil, Mergers
and Acquisitions in Singapore: Law and Practice
(Singapore: LexisNexis,
2013).

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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