[Sanjana Arvind Kumar and Divya Rau are final year law students at Jindal Global Law School]
The Securities Exchange Board of India (“SEBI”) through, its board meeting, on 29 September 2020, approved an amendment to the SEBI (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”). The amendment aims to simplify the delisting procedure for listed subsidiaries of listed companies. It exempts listed subsidiaries from the reverse book building (“RBB”) process on the condition that the delisting subsidiary becomes a wholly-owned subsidiary of its listed parent company through a scheme of arrangement.
At the outset, delisting refers to the permanent removal of a company’s securities from a recognized stock exchange. Upon delisting, a company’s securities are no longer publicly traded. A company intending to delist is generally required to purchase its shares from public shareholders and RBB is the process of price discovery to assist delisting.
To avail the newfound exemption, the listed parent company and the listed subsidiary must be in the same line of business and compliant with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). Additionally, the exemption prescribes a voting threshold whereby the votes cast by public shareholders in favour of delisting the subsidiary must be at least twice the votes against delisting. At the time of delisting, the shares of the parent and subsidiary company should have been listed for a minimum of three years and should not be suspended. Further, the subsidiary must be a listed subsidiary of the parent company for at least three preceding years. The purpose of this post is to analyse the impact of the amendment.
Legal Framework
The process of delisting of equity shares is primarily governed by the Delisting Regulations. RBB is the process used to determine the offer price, i.e., the process of price discovery for the purchase of shares by the shareholder seeking a delisting of the company. The RBB process is only applicable in the case of complete delisting that requires an exit option for all public shareholders, as the company’s shares are removed from all concerned stock exchanges. In case of delisting from one or more stock exchange, where the company continues to be listed on other stock exchanges, public shareholders do not require an exit option and, hence, the RBB process is not triggered.
The RBB process is detailed in regulation 15 read with schedule II of the Delisting Regulations. The delisting company must obtain the approval of the board of directors and that of the shareholders, as well as the in-principle approval of the stock exchange. The promoter of the delisting company is required to nominate a merchant bank and a trading member to facilitate the process. The company must first make a public announcement of its intention to delist. After the public announcement, the public shareholders file a letter of offer and a bidding form with the concerned stock exchanges. A floor price is fixed in accordance with regulation 8 of the SEBI (Substantial Acquisition Of Shares And Takeovers) Regulations, 2011 and all bids must be equal to or above the floor price. The final offer price is determined after aggregating all shareholder bids; the promoters’ shareholding, including the accepted eligible bids, should meet a minimum threshold of 90%. The promoter is empowered to make a counteroffer above the book value within two days from the discovery of the price. If the promoter rejects the final offer price, the company continues to be listed, making the entire delisting exercise unsuccessful.
The amendment approves an exemption from the RBB process for a listed subsidiary only where a scheme of arrangement effectuates the transfer of 100% control of the delisting subsidiary to the listed parent company. The scheme of arrangement is governed by section 230 of the Companies Act 2013 (“CA 2013”), requiring approval of the board of directors, shareholders and the National Company Law Tribunal (“NCLT”). Further, the LODR Regulations stipulates that the listed entity must receive an observation letter or a no-objection letter from the concerned stock exchanges and SEBI upon submission of the draft scheme prior to filing for NCLT approval.
Ease of Compliance versus Investor Protection
The RBB process for delisting is a time-consuming and an expensive exercise for listed companies. It confers on the public shareholders a significant amount of control over the delisting process, which can lead to an unnecessary impediment to delisting. The amendment eliminates the back and forth between the listed subsidiary and public shareholders in order to determine the offer price, thereby streamlining the delisting process. In the standard process, the promoters’ shareholding following the acceptance of bids must amount to 90%, thereby implying that for successful delisting the promoter need not be the sole shareholder. However, by way of the amendment, the scheme of arrangement requires 100% ownership to lie with the parent company, meaning that the parent company becomes the sole shareholder. Therefore, a major benefit of delisting through a scheme of arrangement is the complete exit of public shareholders.
The amendment is not a blanket exemption and provides for specific time and voting thresholds, limiting its applicability. Delisting through a scheme of arrangement does not involve cash consideration, and public shareholders of the delisting subsidiary acquire shares in the listed parent company, thereby protecting their interests. The calculation of shares is based on a share swap ratio determined by an independent evaluation of the shares in both the listed parent company and the delisting subsidiary. The share swap ratio is independently calculated to ensure fairness. Since the parent and the subsidiary must be in the same line of business, the proposed exemption ensures that shareholders do not acquire shares in a holding company conducting business vastly distinct and unrelated to the delisting subsidiary. Further, the voting requirement offers protection to public shareholders, as it places a high threshold for delisting subsidiaries.
A challenge posed by the amendment is the time threshold. The subsidiary intending to delist is not only required to be listed for three years, but must also be a listed subsidiary of a listed parent company for three years. For example, Company X is listed for five years and Company Y acquires a controlling stake, making Company X a listed subsidiary of Company Y. If Company X wishes to delist after one year from the date of such acquisition, the exemption is inapplicable. Hence, the time threshold may slow down the application of this exemption and delay the consolidation and restructuring of a holding and subsidiary company.
Conclusion
Upon successful delisting of the subsidiary through the amendment, the parent company of the delisting subsidiary continues to be listed on the stock exchange. Section 2(71) of the CA 2013 states that the subsidiary of a company, which is not a private company, is a deemed public company. While a deemed public company may retain certain characteristics of a private company in terms of its articles of association, it has a higher standard of compliance than a private company. Hence, although the amendment relaxes the delisting requirement for eligible listed subsidiaries, it ensures a degree of regulation.
SEBI, in its consultation paper in March 2020, discussed an exemption from the Delisting Regulations for listed subsidiaries delisting through a scheme of arrangement with its listed parent company. However, through the amendment, SEBI has adopted a cautious approach. Instead of offering a complete exemption from the Delisting Regulations as earlier proposed, the amendment only provides an exemption from the RBB process. It also lays down strict thresholds – same line of business, a voting threshold and a time threshold, thereby narrowing its application. Therefore, while SEBI is attempting to balance the ease of compliance on the one hand and investor protection considerations on the other, it is yet to be seen whether the amendment offers real relief or ease. Further, SEBI must clarify any restrictions on restructuring of the wholly owned subsidiary or the listed holding company following the delisting.
– Sanjana Arvind Kumar & Divya Rau
