SEBI Reforms – Part 2: Delisting

Delisting of securities tends to be
somewhat controversial given that it represents the tension between the
interests of the controlling shareholder who want to delist the company and the
interests of minority shareholders who are caught between the options of
exiting the company at the offered value or remaining in the company without
the liquidity and protections that a stock exchange listing provides. These
controversies have played out in the Indian markets as well thereby
necessitating a review of the SEBI (Delisting of Equity Shares) Regulations, 2009.
The review commenced with SEBI’s
discussion paper on the topic earlier this year. Somasekhar Sundaresan and I
have separately analysed SEBI’s discussion paper (here
and here,
respectively). SEBI’s approach has been to address two broad concerns. First,
the constraints and complexities in the delisting regime make it difficult for
controllers to successfully delist. Second, 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.
In the recently announced reforms,
SEBI appears to have considered responses to the discussion paper. In tweaking
the regime, SEBI has addressed one of the above issues, but not the other. The
reforms continue to protect the interest of minority shareholders against both the
controllers as well as significant public shareholders. On the other hand, it
has arguably made it more difficult for controllers to delist their companies
(rather than ease the process as it initially set out to do). An analysis of a
few of the reforms would demonstrate this point further.
SEBI has reinforced the importance
of the reverse book-building (RBB) process for delisting. While the RBB has
arguably operated in favour of public shareholders, its rigidity has paid put
to controllers’ delisting plans. It appeared from the discussion paper that
SEBI may be willing to reconsider the utility of RBB in delisting, but in the
end decided to stay with the option. Hence, it is unlikely that the new regime
would make a significant difference to controllers’ delisting efforts. Although
some of us had suggested alternatives to the RBB method that might facilitate
value-generating delisting that might nevertheless protect the minority
shareholders, that option does not appear to have found favour with SEBI.
Furthermore, the thresholds for
delisting continue to be quite daunting. A successful delisting requires the
satisfaction of two conditions: (i) the shareholding of the acquirer together
with the shares tendered by public shareholders must constitute 90% of the
total share capital of the company, and (ii) at least 25% of the number of
public shareholders must tender in the RBB process.
As for the offer price, it would be
determined through RBB and shall be the price at which the shareholding of the
promoter, including the shareholding of the public shareholders who have
tendered their shares, reaches the threshold limit of 90%.
At the same time, SEBI has
undertaken some efforts relax some aspects of the process. For instance, the
timelines for delisting have been reduced from approximately 117 working days
to 76 working days. Public shareholders will benefit from taxation benefits accompany
the proposal to use the stock exchange platform for delisting (which have also
been extended to buyback and takeovers). Finally, exemptions have been carved
out for small and medium-sized companies who are spared the strict norms for
delisting.
A surprise inclusion in the reforms
(that was conspicuously absent in SEBI’s discussion paper) is the streamlining
of SEBI’s takeover regulations with the delisting regulations. It would now be
possible for an acquirer who has made an offer under the takeover regulations
to delist directly without increasing the public shareholding. This would ease
the process for acquirers who wish to make an offer to the target’s
shareholders and simultaneously delist the target if the offer is successful.
It creates the badly needed symmetry between the regimes relating to takeovers
and delisting. This recommendation made by the Takeover Regulations Advisory
Committee (TRAC), which was ignored in the SEBI Takeover Regulations of 2011
and also in SEBI’s discussion paper on delisting, has finally seen the light of
day.
In all, the reforms relating to
delisting represent a mixed bag. The changes are incremental in nature, which
do not affect the overall philosophy or address the broader concerns and
tensions in delisting. Given this scenario, it is not clear if we will witness significant
changes in the manner in which delisting is carried out in India or the type of
problems faced. Again, we will have to await the text of the amendments to the
regulations before making more detailed prognoses.

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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