New regulations on delisting have
been approved by SEBI. I wrote a column
on December 1, 2014 (print edition) of the Business Standard, on how a new element
of requiring at least 25% of the public shareholders as of a certain date to
have participated in selling their shares, would nudge toward counter-productive
outcomes. I have pasted the copy below.
been approved by SEBI. I wrote a column
on December 1, 2014 (print edition) of the Business Standard, on how a new element
of requiring at least 25% of the public shareholders as of a certain date to
have participated in selling their shares, would nudge toward counter-productive
outcomes. I have pasted the copy below.
Earlier,
Umakanth had commented
on the new delisting regulations too, which in turn, also tagged my earlier column
on the need to synchronize the takeover regulations and the delisting
regulations. SEBI’s press release
suggests that there has been effort in the new regulations to address that aspect
of the regulatory problem – the actual draft of the regulations is awaited.
Umakanth had commented
on the new delisting regulations too, which in turn, also tagged my earlier column
on the need to synchronize the takeover regulations and the delisting
regulations. SEBI’s press release
suggests that there has been effort in the new regulations to address that aspect
of the regulatory problem – the actual draft of the regulations is awaited.
“Sebi eases
de-listing norms,” was the theme of nearly every single media report after
the board meeting of the securities market regulator held on November 19. Even
before the board meeting, scores of reports had dotted the media about how at
that meeting, Sebi would be making life simpler for transparent de-listing of
shares from Indian stock exchanges.
The
fine print is yet to be out. However, even while waiting for the fine print,
the very first paragraph in Sebi’s press release on the subject makes it clear
that de-listing transactions have been made far more difficult – they have not
been made easier. The paragraph says: “The de-listing shall be considered
successful only when (A) the shareholding of the acquirer together with the
shares tendered by public shareholders reaches 90 per cent of the total share
capital of the company and (B) if at least 25 per cent of the number of public
shareholders, holding shares in dematerialised mode as on the date of the board
meeting which approves the de-listing proposal, tender in the reverse book
building process.”
The
widening gap between approval of regulations by Sebi at a board meeting and the
actual draft regulations being notified is worrisome. This practice
demonstrates that the directors on the Sebi board, despite presiding over the
governance of a regulatory body, consider the actual language of the
regulations as too trivial to bother themselves with. It is evident that they
approve regulatory prescriptions in abstract concept, although anyone involved
with regulations anywhere in the world would know that the devil in regulatory
frameworks lies in the detail. That is worthy of comment in a separate column
altogether.
Coming
back to the Sebi press release, not only has de-listing been made tougher, the
new intervention in the regulations is a material deviation from
well-established principles of Indian corporate law. The prescription that 25
per cent of the public shareholders in number have to tender their shares is
seriously problematic in implementation. Worse, it is blatantly in
contradiction with the colour sought to be given to the “reform” of
the regulations i.e. of making things easier. Two other new conditions have
been imposed. First, the number of shareholders should have tendered their shares
in dematerialised form. Second, the number of shareholders should be reckoned
on the date on which the board approves the de-listing.
It is
well possible that a company can never delist simply because shareholders who
held shares on the date the board approved may have sold their shares.
Therefore, if there is a churn in the holdings of public shareholders, it is
possible that more than 75 per cent of the shareholders who held shares on that
date are no longer shareholders. In other words, the condition of at least 25
per cent shareholders in number as of a certain date should tender shares,
could never be met.
The
most serious problem with the new approach is that Indian securities law would
deviate for the first time from the well-established norm of corporate
democracy – of reckoning voting rights in terms of percentage of shareholding
rather than in terms of number of shareholders. For example, when company law lays
down the standard for a resolution to be passed, it prescribes counting the
vote in terms of voting rights attached to the shares. It does not provide for attaching
equal voting rights to all shareholders regardless of how many shares each one
owns. Sebi’s new approach or introducing the number of shareholders as a
metric, would initiate new jurisprudence that is wholly unnecessary.
Such
an approach could in fact incentivise fraud and
impose enormous transaction costs on market players and serious administrative
costs on Sebi to monitor compliance. When Sebi’s stated objective is to combat
fraudulent collusion between large public shareholders and the promoters when a
company is being de-listed, it simply has to step up the game for enforcement.
By changing the law, it is imposing an unwarranted burden on the market and on
itself. Take the law on oppression and mismanagement under company law.
The
law places a materiality threshold for eligibility to approach the enforcement
machinery in terms of 10 per cent of the voting rights or a hundred
shareholders in number. This is to enable a greater access to justice if there
were widespread discomfort among shareholders regardless of number of shares
held. However, this very provision is a source of enormous litigation. Often,
just before initiating litigation, shares get transferred to multiple persons
to meet the eligibility threshold of the larger number of aggrieved
shareholders.
Weeks
and months are then spent in intense litigation to determine the legitimacy of
the very threshold to assert rights. Company managements typically allege that
the transfers are a fraud only to meet eligibility norms. Shareholders argue
that the literal meaning of the law should be adopted. In short, the new
regulatory measure will nudge the securities market too towards adopting such
bad practices, with the resultant litigation.
Sebi’s
shoulders are very broad and their muscles are highly empowered to act against
fraudulent practices when it finds collusion between promoters and sections of public
shareholders. Both the Sebi Act and the regulations prohibiting fraudulent and
unfair trade practices give Sebi sweeping powers. It should use that muscle for
enforcement if it finds abuse in the de-listing market. The propensity to
legislate against every problem, real and perceived, makes life difficult for
all, and worse, seeds further bad conduct.
de-listing norms,” was the theme of nearly every single media report after
the board meeting of the securities market regulator held on November 19. Even
before the board meeting, scores of reports had dotted the media about how at
that meeting, Sebi would be making life simpler for transparent de-listing of
shares from Indian stock exchanges.
The
fine print is yet to be out. However, even while waiting for the fine print,
the very first paragraph in Sebi’s press release on the subject makes it clear
that de-listing transactions have been made far more difficult – they have not
been made easier. The paragraph says: “The de-listing shall be considered
successful only when (A) the shareholding of the acquirer together with the
shares tendered by public shareholders reaches 90 per cent of the total share
capital of the company and (B) if at least 25 per cent of the number of public
shareholders, holding shares in dematerialised mode as on the date of the board
meeting which approves the de-listing proposal, tender in the reverse book
building process.”
The
widening gap between approval of regulations by Sebi at a board meeting and the
actual draft regulations being notified is worrisome. This practice
demonstrates that the directors on the Sebi board, despite presiding over the
governance of a regulatory body, consider the actual language of the
regulations as too trivial to bother themselves with. It is evident that they
approve regulatory prescriptions in abstract concept, although anyone involved
with regulations anywhere in the world would know that the devil in regulatory
frameworks lies in the detail. That is worthy of comment in a separate column
altogether.
Coming
back to the Sebi press release, not only has de-listing been made tougher, the
new intervention in the regulations is a material deviation from
well-established principles of Indian corporate law. The prescription that 25
per cent of the public shareholders in number have to tender their shares is
seriously problematic in implementation. Worse, it is blatantly in
contradiction with the colour sought to be given to the “reform” of
the regulations i.e. of making things easier. Two other new conditions have
been imposed. First, the number of shareholders should have tendered their shares
in dematerialised form. Second, the number of shareholders should be reckoned
on the date on which the board approves the de-listing.
It is
well possible that a company can never delist simply because shareholders who
held shares on the date the board approved may have sold their shares.
Therefore, if there is a churn in the holdings of public shareholders, it is
possible that more than 75 per cent of the shareholders who held shares on that
date are no longer shareholders. In other words, the condition of at least 25
per cent shareholders in number as of a certain date should tender shares,
could never be met.
The
most serious problem with the new approach is that Indian securities law would
deviate for the first time from the well-established norm of corporate
democracy – of reckoning voting rights in terms of percentage of shareholding
rather than in terms of number of shareholders. For example, when company law lays
down the standard for a resolution to be passed, it prescribes counting the
vote in terms of voting rights attached to the shares. It does not provide for attaching
equal voting rights to all shareholders regardless of how many shares each one
owns. Sebi’s new approach or introducing the number of shareholders as a
metric, would initiate new jurisprudence that is wholly unnecessary.
Such
an approach could in fact incentivise fraud and
impose enormous transaction costs on market players and serious administrative
costs on Sebi to monitor compliance. When Sebi’s stated objective is to combat
fraudulent collusion between large public shareholders and the promoters when a
company is being de-listed, it simply has to step up the game for enforcement.
By changing the law, it is imposing an unwarranted burden on the market and on
itself. Take the law on oppression and mismanagement under company law.
The
law places a materiality threshold for eligibility to approach the enforcement
machinery in terms of 10 per cent of the voting rights or a hundred
shareholders in number. This is to enable a greater access to justice if there
were widespread discomfort among shareholders regardless of number of shares
held. However, this very provision is a source of enormous litigation. Often,
just before initiating litigation, shares get transferred to multiple persons
to meet the eligibility threshold of the larger number of aggrieved
shareholders.
Weeks
and months are then spent in intense litigation to determine the legitimacy of
the very threshold to assert rights. Company managements typically allege that
the transfers are a fraud only to meet eligibility norms. Shareholders argue
that the literal meaning of the law should be adopted. In short, the new
regulatory measure will nudge the securities market too towards adopting such
bad practices, with the resultant litigation.
Sebi’s
shoulders are very broad and their muscles are highly empowered to act against
fraudulent practices when it finds collusion between promoters and sections of public
shareholders. Both the Sebi Act and the regulations prohibiting fraudulent and
unfair trade practices give Sebi sweeping powers. It should use that muscle for
enforcement if it finds abuse in the de-listing market. The propensity to
legislate against every problem, real and perceived, makes life difficult for
all, and worse, seeds further bad conduct.