[Aadya Conjeevaram is a third-year undergraduate student at the West Bengal National University of Juridical Sciences, Kolkata]
The Securities and Exchange Board of India (“SEBI”) through a consultation paper (“Consultation Paper”) proposed significant changes to enhance the delisting process. A sub-group, led by Mr. Keki Mistry and comprising members from the Primary Market Advisory Committee (“PMAC”) formulated policy recommendations to ensure a more balanced approach for stakeholders and forms the basis of the Consultation Paper. Notably, the suggested changes include replacing the reverse book building (“RBB”) mechanism with a fixed-price method for voluntary delisting. SEBI’s chairperson said that an analysis of delisting attempts emphasised a notable prevalence of speculative trades and the proposed shift in approach aims to counteract potential manipulation of exit prices. While not inherently illegal, such speculative trades carry significant implications for shareholders and overall market integrity.
The Existing Framework
A company’s promoters may choose to delist for a myriad of reasons such as the financial burden of dealing with compliance and disclosure requirements, expenses to maintain a listed stock or simply the non-materialisation of the advantages of being a listed company. The SEBI (Delisting of Equity Shares) Regulations, 2021 (“Delisting Regulations”) requires the acquirer/promoter to provide their public shareholders an exit opportunity, which is currently determined through the RBB mechanism. The acquirer/promoter declares a floor price, and the public shareholders then tender their shares through the stock exchange mechanism during a bidding period at the price at which they would be willing to sell their shares. If the post-offer shareholding of the promoter/acquirer, along with shares tendered by public shareholders, does not reach 90% of the company’s outstanding shares, the delisting offer fails. However, if it reaches 90%, the discovered price is determined, and if accepted by the acquirer, the delisting is successful. If the discovered price is rejected, the acquirer can make a counter-offer not less than the company’s book value. The success of the counter-offer depends on the post-counter-offer shareholding reaching 90% of the total issued shares.
The consultation paper discusses shifting to an alternative delisting mechanism, specifically a ‘fixed price’ mechanism. The sub-group proposes provisions to the Takeover Regulations for determining the floor price for delisting offers under the Delisting Regulations. An additional parameter, “Adjusted Book Value,” is proposed to safeguard shareholder interests by considering the fair market value of the company’s assets.
In the proposed framework, the floor price is the highest of:
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- Volume-weighted average price for acquisitions in the 52 weeks preceding the reference date.
- Highest price paid for any acquisition in the 26 weeks preceding the reference date.
- Volume-weighted average market price for 60 trading days preceding the reference date on the stock exchange with the highest trading volume.
- Adjusted book value (considering consolidated financials) determined by an independent registered valuer.
Notably, there is no upper limit imposed on the maximum price.
The suggested fixed price mechanism is exclusively applicable to companies whose shares are frequently traded possibly because they have a market-discovered price. Additionally, the fixed price presented must be greater than the floor price established by this framework, and the success of the delisting offer is contingent upon the post-offer shareholding reaching the 90% threshold.
Delving into India’s Delisting Landscape
One of the cornerstones of a healthy securities market is a seamless environment for business transactions, and to ensure that, both the listing and delisting processes should be characterised by efficiency and facilitative simplicity. One of the primary justifications for the proposed changes, as outlined by SEBI, is the observation that speculators were engaging in large-scale acquisitions of shares, thereby artificially inflating the share price. This presents a significant obstacle for companies seeking delisting, as they are then compelled to bear an exorbitant and impractical premium to delist. Furthermore, this practice is incongruent with SEBI’s vision, which aims to mitigate the presence of market participants who find themselves unable to exit. Several instances of unsuccessful delistings due to substantial premium prices have been observed. For instance, in cases such as Brady and Morris Engineering Company, the price determined through the RBB process exhibited a substantial 1128.70% premium over the floor price. Similarly, Vedanta in 2020 saw demand for a 267% premium, and Linde India in 2019 at 517%. A report by SEBI analysing data from 2015 to 2018 reveals that 53% of companies voluntarily delisted through the RBB process were delisted at premiums with a median value of 125% .
The fixed price approach is a considerably more simplified procedure, which eliminates a substantial portion of the complex intricacies associated with the RBB method. Notably, this approach could potentially eliminate the allegations of speculation regarding the delisting price, thereby enhancing the process’s resilience against them.
A Case for Fixed-Price Voluntary Delisting
The RBB mechanism was introduced through the Delisting Regulations in 2003. In the 2002 delisting committee reportthat led to its incorporation, SEBI advocated the adoption of the RBB method over the fixed price approach. This endorsement was grounded in the belief that RBB enhances transparency and provides a safeguard against potential investor losses arising from market fluctuations. Unlike the current proposal, which envisages fixed price to be linked to the factors listed under the Takeover Regulations and the Adjusted Book Value, the 2003 report cautioned against fixed price exit which was determined by the average of the preceding 26 weeks’ high and low prices in the then prevailing depressed market conditions. The conditions in 2003 were markedly differed; there was a surge in delisting across various regional exchanges, particularly by MNCs. It had become a discernible trend, prompting concerns about its continued prevalence and garnered widespread attention and created unease and anxiety among investors who felt that the exit price offered to them was unjust, due to depressed conditions. Significantly, the heightened concerns were exacerbated by the lack of explicit delisting guidelines and regulations which are in place today. This discrepancy is particularly noteworthy as the criteria governing the determination of the exit price differs substantially from those contemplated in the current proposal
Another noteworthy concern pertains to the information asymmetry between the promoter and investors, potentially hindering investors from maximizing their investments. However, if promoters engage in share purchases without any financial justification based on privileged information, regulatory scrutiny and investor attention could be triggered. To address power imbalances, SEBI could consider implementing checks and balances, such as approvals and certifications by SEBI and merchant bankers possessing superior market dynamics information.
The proposed changes have also faced criticism for potentially negatively impacting the rights of minority shareholders. India’s corporate landscape is characterised by a notable concentration of ownership, granting significant control to owners who usually constitute the majority shareholding which enables them with control and power to safeguard their interests. In line with this the company’s board, dominated by majority shareholders, may determine the exit price without adequately considering input from minorities, leaving them without adequate protection. However, the delisting process requires compliance with S.11(4) of the Delisting Regulations, which stipulates that a special resolution must be passed via postal ballot by public shareholders. The affirmative votes from public shareholders in support of the delisting proposal must be twice the number of votes cast against it, necessitating approval from 66.66% of the public shareholders. Furthermore, the delisting endeavour can only be deemed successful if an adequate number of shares are tendered by public shareholders, reaching the delisting threshold of 90% shareholding. Presently, a minimum of 25% of a listed company’s shares must be available to the public for trading. Consequently, promoters must secure the consent of at least 15% of public shareholders to sell their shares at the offered price for the delisting to proceed successfully. Moreover, in contrast to the RBB process, the fixed price approach lacks the provision for the promoter/acquirer to present a counteroffer. In the event of a delisting failure, restarting the delisting process becomes necessary to propose an exit at a different price. This entails a costly exercise, thus providing an additional incentive for companies to present competitive exit prices.
Conclusion
SEBI’s proposed changes aim to enhance the delisting process by transitioning from the existing RBB mechanism to [a more straightforward] fixed price mechanism. The motivation behind this shift lies in addressing concerns related to speculative trading and inflated exit prices during delisting attempts. The determination of the delisting price, whether by promoters or shareholders, should ensure a fair and just agreement. While the RBB process has historical significance, according to SEBI, its complexities and potential for market manipulation have prompted the consideration of a streamlined approach. It is conjectured that a fixed price mechanism will eliminate speculation, ensure a more predictable exit price, and contribute to a transparent and competitive delisting environment. In this article, I argued that the fixed price method is fairer to promoters and is in line with ease of doing business. The proposed framework with a few additional safeguards can ensure the interests of minority shareholders as well. Consequently, the fixed price approach is an initiative that not only facilitates ease of business operations but also safeguards capital markets from potential pitfalls associated with RBB. Achieving a balanced regulatory framework will require striking the right chord between streamlining procedures and safeguarding the interests of all shareholders. Implementation of these changes must ensure that minority shareholders receive adequate protection and have meaningful participation in the delisting process.
– Aadya Conjeevaram
