[Abhinav Gupta and Ayush Khandelwal are final year students at National Law University, Jodhpur]
The Securities and Exchange Board of India (“SEBI”) on 20 November 2020 issued a consultation paper to review the SEBI (Delisting of Equity Shares) Regulations, 2009. It aims to enhance disclosures to help investors to make informed decisions, rationalize the timeline under the Delisting Regulations, and streamline them to introduce greater transparency and efficiency. In this post, the authors endeavor to examine certain key proposals by SEBI under the consultation paper.
Analysis of the Proposals
Disclosure of the intention to delist the company
The current provision under the Delisting Regulations requires the board of directors of a company to disclose the promoter’s proposal to voluntarily delist the company [see regulation 8(1A)(i)]. Such information is required to be disclosed to the stock exchange before granting approval on the proposal. Accordingly, there exists a gap between the date of receiving the proposal of the promoter and the date of informing the investors of such a proposal. SEBI is of the view that a gap between these two events leaves scope for information asymmetry with respect to the investors. Further, such information is price-sensitive and must be disclosed to the public immediately to prevent insider trading. Therefore, SEBI has proposed that the promoters shall disclose their intention by way of an initial public announcement to voluntarily delist the company to the stock exchange on the same day such information is provided to the company.
If the above proposal is implemented by SEBI, a change in the reference date for computation of floor price is also required. Initially, the Delisting Regulations provided that the reference date for fixing of floor price would be the date of the public announcement of delisting. However, in 2018 SEBI amended the Delisting Regulations and clarified that the reference date will be the date on which the stock exchanges are informed of the meeting of the board of directors in which the proposal for a voluntary delisting is to be considered. SEBI clarified that a time gap between the prior intimation of such board meeting and the public announcement of delisting affected the discovery of floor price. Hence, a change in the reference date for computation of the floor price is also required as the initial public announcement will be before the date of intimation of the board meeting. We believe that SEBI should consider the date of the initial public announcement as the reference date since such disclosure will be the first instance of information about the delisting coming in the public. Otherwise, a longer time gap between the initial public announcement by the promoter and the date of intimation of the board meeting will increase the floor price computation, thereby affecting the price discovery.
Increasing the role of the independent directors of the company
SEBI has observed that no duty has been cast upon the independent directors under the Delisting Regulations to provide their recommendation on the delisting and whether such delisting in the interest of the shareholders of the company. Regulation 8(1B) of the Delisting Regulations currently imposes an obligation only on the board of directors to certify that the delisting is in the interest of the shareholders. Accordingly, SEBI has proposed that a duty may be imposed on the committee of the independent directors to provide a reasoned recommendation on the delisting proposal. Further, the number of independent directors who voted in favor or against the proposal of delisting may also be provided with the recommendation of the committee.
In addition to this, we suggest that in order to provide optimum protection to shareholders SEBI should consider mandating the appointment of an independent financial adviser to assess the fairness and reasonability of exit offer. A similar amendment was made by the Singapore Exchange Regulation in 2019 in the voluntary delisting rules. This was considered a welcome move improving shareholder protection and providing better exit value to the shareholders.
In our opinion, an independent financial adviser is better suited to comment on the fairness of the exit offer as they possess intricate knowledge of finance. Under the current proposal, the independent directors are allowed but not mandated to obtain external advice. Mandating an independent financial adviser to assess the fairness of the exit offer would reinforce the faith of the investors in the recommendation of the committee.
Moreover, the consultation paper fails to provide a timeline during which such a committee of independent directors should be constituted. In its absence, if the meeting takes place before the valuation, the investors will not be able to receive an independent director’s recommendation on the most critical aspect of the delisting offer i.e., the offer price. Hence, SEBI must clarify at what stage such a committee has to be constituted.
Indicative price in the public announcement
SEBI has identified that in some delisting offers the promoter also mentions an “indicative price” or “attractive price” in the public announcement or letter of offer. An indicative price is a price that the promoter may be willing to pay to the shareholder and is more than the floor price. However, disclosure of indicative price is not mandated under the provision of Delisting Regulations as opposed to floor price which has to be mentioned in the public announcement [see regulation 10(2)]. SEBI is of the view that an indicative price shows the willingness of the promoters to pay more than the floor price, which in turn benefits the shareholders. Accordingly, SEBI has proposed that an indicative price may be provided by the promoter in the public announcement.
The authors believe that an indicative price may be misleading for the shareholders as an indicative price is provided merely to guide the shareholders to the desired price and can be used to influence the decision of the shareholders. . In another proposal, SEBI has mentioned that if the price arrived through reverse book building is equal to the floor price then the promoters will be bound by such price. However, it has not been specified whether the promoter will be bound if the price arrived through reverse book building is equal to the indicative price
Unconfirmed bids during the tendering process
SEBI’s consultation paper also proposes that during the tendering process the unconfirmed bids shall not be displayed in the stock exchange reverse book building window. SEBI’s proposal has emerged following a failed attempt of delisting of Vedanta Ltd. due to unconfirmed bids in respect of 12.31 crore shares. Reports indicate that SEBI is investigating why the bids remained unconfirmed until the closure of the bidding period. SEBI believes that it could clear the false indication such unconfirmed bids give to the shareholders. However, the unconfirmed bids could be also due to the technical glitches on the stock exchange platform. Not displaying such unconfirmed bids may harm the interest of the company and the promoter, as it could stop the momentum of tendering the shares. Hence, it would be ideal to clarify the treatment of unconfirmed bids that arise merely due to technical glitches.
Cooling off period for relisting and after buy-back and preferential allotment
Regulation 30(1) of the Delisting Regulations provides that an application for listing of equity shares that have been delisted may be filed only after a cooling-off period of five years after delisting. SEBI has observed that a cooling-off period of five years for relisting is a major hindrance for a delisted company that requires funds due to new business opportunities. Moreover, the regulator has also observed that a company may delist due to strategic initiatives and may want to relist after the completion of such initiatives. Therefore, the regulator has proposed to reduce the cooling period off period for relisting to three years. The proposal of SEBI is a welcome step as it could help the companies that require access to capital markets after delisting. It is noteworthy that in the erstwhile delisting regulations SEBI had mandated a cooling-off period of only two years for relisting of securities.
Another proposal is that the companies cannot make a delisting offer before the lapse of six months from the date of buyback or preferential allotment. This cooling-off period is provided in order to prevent a situation where companies will buy back shares right before the delisting to avoid paying a higher exit price for the same shares. This proposal pre-emptively tackles any kind of unfair practices by the company. However, it is debatable whether the relatively short period of six months is enough to fulfill the underlying objective.
Conclusion
SEBI’s proposals seek to provide better protection to the shareholders and speedier completion of the delisting process. By specifying timelines for various steps that were absent earlier, SEBI has sought to plug gaps that caused a delay in the delisting process. The proposals in the consultation paper try to gauge the seriousness of the acquirer to avoid a situation where a delisting offer was made only to drive the share price upwards. However, the recommendations still need some fine-tuning and it remains to be seen what the final amendment entails after receiving the public comments.
– Abhinav Gupta & Ayush Khandelwal
