Delisting transactions tend to be
sensitive as they underscore the conflicts between controlling shareholders (or
promoters) and minority shareholders. The promoters are in a position to delist
the company at any time they consider appropriate even though the circumstances
may not necessarily favour the minority shareholders. Moreover, due to the
information asymmetry between the two groups of shareholders, the promoters may
seek to benefit at the cost of the minority shareholders. In other words, given
the superior levels of information possessed by promoters, they can choose to
delist at a time when they may have to pay the minority shareholders the lowest
possible price.
sensitive as they underscore the conflicts between controlling shareholders (or
promoters) and minority shareholders. The promoters are in a position to delist
the company at any time they consider appropriate even though the circumstances
may not necessarily favour the minority shareholders. Moreover, due to the
information asymmetry between the two groups of shareholders, the promoters may
seek to benefit at the cost of the minority shareholders. In other words, given
the superior levels of information possessed by promoters, they can choose to
delist at a time when they may have to pay the minority shareholders the lowest
possible price.
However, the SEBI (Delisting of
Equity Shares) Regulations, 2009 as amended in 2015 (the “Delisting
Regulations”) seeks to assuage the concerns of minority shareholders by not
only setting out an elaborate process for delisting but also by enabling price
discovery through the “reverse bookbuilding” process. In certain situations,
such protections may not be adequate due to unforeseen circumstances,
especially if the price discovery process has been completed without the
availability of all relevant information to the bidding shareholders. One such
scenario played out in a recent case where SEBI intervened with an order
issued yesterday.
Equity Shares) Regulations, 2009 as amended in 2015 (the “Delisting
Regulations”) seeks to assuage the concerns of minority shareholders by not
only setting out an elaborate process for delisting but also by enabling price
discovery through the “reverse bookbuilding” process. In certain situations,
such protections may not be adequate due to unforeseen circumstances,
especially if the price discovery process has been completed without the
availability of all relevant information to the bidding shareholders. One such
scenario played out in a recent case where SEBI intervened with an order
issued yesterday.
In this case, the promoters of
Essar Oil Limited who hold a majority stake sought to delist the company by
acquiring the remaining 27.53% shares from the minority shareholders. Although
the delisting process was initiated in 2014, it was delayed until 2015 (and
after the amendments to the Delisting Regulations came into force). The
promoters approached SEBI for dispensing with delays from giving effect to
various procedures under the Delisting Regulations. Although the timing issues
are less relevant for the purposes of this post, the question of delisting
price acquired great emphasis in SEBI’s analysis.
Essar Oil Limited who hold a majority stake sought to delist the company by
acquiring the remaining 27.53% shares from the minority shareholders. Although
the delisting process was initiated in 2014, it was delayed until 2015 (and
after the amendments to the Delisting Regulations came into force). The
promoters approached SEBI for dispensing with delays from giving effect to
various procedures under the Delisting Regulations. Although the timing issues
are less relevant for the purposes of this post, the question of delisting
price acquired great emphasis in SEBI’s analysis.
In August 2014, after the delisting
process was initiated, SEBI received a complaint stating a lack of transparency
on the part of the promoters of the company, especially regarding the fixation
of the floor price required for carrying out the reverse bookbuilding. In
particular, it was stated that the promoters of the company had entered into an
agreement with OJSC Roseneft Oil Limited, a Russian company, to sell 49% of
their stake in the company. A request was made to SEBI to ensure that the
delisting price took into account the price at which the promoters were to sell
their stake to Roseneft, which price was not disclosed to the market. The
promoters stated that the price of the sale to Roseneft was still in discussion
and not finalised. In any event, the promoters of the company were willing to
make good the difference between the delisting price and any higher price they
may receive under the transaction with Roseneft within a period of one year
from the delisting. However, a question also arose as to whether such an outer
time limit would be appropriate for the purpose of paying the differential.
process was initiated, SEBI received a complaint stating a lack of transparency
on the part of the promoters of the company, especially regarding the fixation
of the floor price required for carrying out the reverse bookbuilding. In
particular, it was stated that the promoters of the company had entered into an
agreement with OJSC Roseneft Oil Limited, a Russian company, to sell 49% of
their stake in the company. A request was made to SEBI to ensure that the
delisting price took into account the price at which the promoters were to sell
their stake to Roseneft, which price was not disclosed to the market. The
promoters stated that the price of the sale to Roseneft was still in discussion
and not finalised. In any event, the promoters of the company were willing to
make good the difference between the delisting price and any higher price they
may receive under the transaction with Roseneft within a period of one year
from the delisting. However, a question also arose as to whether such an outer
time limit would be appropriate for the purpose of paying the differential.
After consider the facts, SEBI
passed the following order:
passed the following order:
(a) The promoter shall expeditiously make
the public announcement and specifically mention therein and in the letters of
offer that (i) the floor price shall be in accordance with the amended
Delisting Regulations and (ii) that in case the price offered/paid by Roseneft
is higher than the discovered price arrived at in the reverse bookbuilding, the
difference in price shall be paid to the shareholders who tendered their shares
to the promoters in accordance with the Delisting Regulations in the proposed
offer; …
the public announcement and specifically mention therein and in the letters of
offer that (i) the floor price shall be in accordance with the amended
Delisting Regulations and (ii) that in case the price offered/paid by Roseneft
is higher than the discovered price arrived at in the reverse bookbuilding, the
difference in price shall be paid to the shareholders who tendered their shares
to the promoters in accordance with the Delisting Regulations in the proposed
offer; …
Provided that,
notwithstanding any delisting of equity shares of the Company, the promoter/s
of the Company shall be responsible to pay the difference between the
transaction price with Roseneft and the final delisting price to those
shareholders whose shares were accepted in terms of the Delisting Regulations,
if the former is higher. In this regard, the Company/its promoters shall, on
finalization of the transaction with Roseneft, make a public notice, within a
period of 10 days of such finalization, under intimation to SEBI, stating the
details of the transaction including number of shares to be purchased by
Roseneft and the consideration (including
all heads under which the final consideration price is arrived at between the promoter/s
and Roseneft) finalised with Roseneft: …
notwithstanding any delisting of equity shares of the Company, the promoter/s
of the Company shall be responsible to pay the difference between the
transaction price with Roseneft and the final delisting price to those
shareholders whose shares were accepted in terms of the Delisting Regulations,
if the former is higher. In this regard, the Company/its promoters shall, on
finalization of the transaction with Roseneft, make a public notice, within a
period of 10 days of such finalization, under intimation to SEBI, stating the
details of the transaction including number of shares to be purchased by
Roseneft and the consideration (including
all heads under which the final consideration price is arrived at between the promoter/s
and Roseneft) finalised with Roseneft: …
Through its order, SEBI has pegged
the delisting price to any price that the promoters may finalize with Roseneft
even through that transaction may occur subsequent to the delisting, and that
too without prescribing any time limit. Hence, minority shareholders will
benefit from the Roseneft transaction and share in any premium because that is
pending consideration at the time of delisting.
the delisting price to any price that the promoters may finalize with Roseneft
even through that transaction may occur subsequent to the delisting, and that
too without prescribing any time limit. Hence, minority shareholders will
benefit from the Roseneft transaction and share in any premium because that is
pending consideration at the time of delisting.
Overall, such an approach by SEBI
addresses the information asymmetry problems between promoters and minority shareholders
that are accentuated in transactions such as delisting and squeeze outs. In the
present case, the asymmetry was addressed as the matter was brought to SEBI’s
attention by a complainant. In other situations where the promoters initiate a
similar transaction such as the one with Roseneft after completion of the
delisting, it is unlikely that a similar price protection will be available to
the minority shareholders. Hence, the timing of the promoter transaction seems
crucial. In the long term, one possible solution would be to allow the exiting
shareholders to enjoy the economic benefits of transactions involving the
company or the promoters that may be undertaken during a period following the delisting,
as discussed in this paper.
addresses the information asymmetry problems between promoters and minority shareholders
that are accentuated in transactions such as delisting and squeeze outs. In the
present case, the asymmetry was addressed as the matter was brought to SEBI’s
attention by a complainant. In other situations where the promoters initiate a
similar transaction such as the one with Roseneft after completion of the
delisting, it is unlikely that a similar price protection will be available to
the minority shareholders. Hence, the timing of the promoter transaction seems
crucial. In the long term, one possible solution would be to allow the exiting
shareholders to enjoy the economic benefits of transactions involving the
company or the promoters that may be undertaken during a period following the delisting,
as discussed in this paper.