[Ayush Gorana is a final-year B.B.A., LLB (Hons.) Student at Gujarat National Law University, Gandhinagar]
In a significant regulatory development, SEBI in its board meeting on 27 June 2024 approved amendments to the SEBI (Delisting of Equity Shares) Regulations, 2021, thereby introducing the fixed price method as an alternative to the existing reverse book building (RBB) process for voluntary delisting. This move aims to address issues of speculative trading and inflated exit prices that have plagued the RBB method. By offering a fixed price mechanism, SEBI seeks to provide a clearer and more predictable pathway for companies and investors involved in the delisting process.
Historical Evolution of India’s Delisting Framework
Over the years, the methods and regulations surrounding delisting have evolved to balance the interests of promoters and investors while maintaining market integrity. Through a circular issued in 1998, SEBI introduced the fixed price method to provide an exit opportunity to shareholders in case of voluntary delisting. Under this method, the promoter would offer a predetermined price to the public shareholders to buy their shares. This method was straightforward but often criticized for its lack of transparency and potential to undervalue shares, leading to dissatisfaction among minority shareholders. The absence of a competitive bidding process meant that shareholders had little say in determining the delisting price, which sometimes resulted in exit prices that did not reflect the true market value of the shares.
Then in 2003, by way of the SEBI (Delisting of Securities) Guidelines, 2003, SEBI introduced the RBB process as a more transparent and equitable method for voluntary delisting. The process requires promoters to discover the delisting price through an auction-like mechanism where public shareholders could bid their shares at prices they deemed fair. The final delisting price is determined based on these bids, ensuring that the exit price reflected the market consensus. This method has been lauded for enhancing transparency and fairness, giving shareholders a greater voice in the delisting process.
Reintroduction of the Fixed Price Method alongside Reverse Book Building
Now, SEBI has transitioned back to fixed price method along with RBB, acknowledging the limitations and challenges posed by the latter. The fixed price method, as reintroduced, mandates that the price offered must include at least a 15% premium over the floor price, aiming to protect shareholders from undervaluation. This decision was influenced by the need to counteract speculative trading and inflated exit prices that had become prevalent under the RBB method. By offering both methods, SEBI aims to provide flexibility and address the diverse needs of companies and investors in the voluntary delisting process. This dual approach allows promoters to choose the method that best suits their circumstances while ensuring that shareholders receive a fair and transparent exit opportunity.
Limitations and Issues with the RBB Method
The RBB process, initially successful in introducing transparency to the delisting process, has faced several issues over time, as highlighted in SEBI’s discussion paper. One of the significant concerns with the RBB method is the increase in speculative trading around delisting events. Speculative activity often leads to significant price volatility, making it challenging for shareholders to make informed decisions. For instance, during the delisting of Hexaware Technologiesin 2020, speculative trading activity surged after the promoter, HT Global, announced a delisting plan. This announcement caused significant price fluctuations, complicating the decision-making process for shareholders. Such volatility creates uncertainty for genuine investors and can distort the true value of the shares.
Moreover, the bidding mechanism of the RBB process often results in artificially inflated exit prices. Speculators and certain investor groups bid at unreasonably high prices, driving up the cost for promoters to delist their shares. This inflation not only makes the delisting process more expensive but also leads to disputes and dissatisfaction among shareholders who are not part of the speculation.
From the delisting data available for the financial years 2009 to 2013, it was observed that out of 38 companies which opted for delisting, in case of 11 companies the premium in the discovered price was more than 100%. A notable example is the delisting attempt of Brady and Morris Engineering Company in 2020, where the exit price skyrocketed to a remarkable 1128.70% premium over the floor price. This substantial increase, driven by speculative bids, led to the promoter ultimately rejecting the delisting proposal.
From 2018 to 2023, the Indian market witnessed a total of 114 voluntary delisting attempts, with 28 of these being unsuccessful. This period saw a notable trend where successful delisting attempts were more prevalent among small-cap companies, while mid-cap delistings were rare, and large-cap delistings were almost non-existent.
The data further reveals that the most common reasons for unsuccessful delisting attempts include insufficient tender of shares in the RBB process and rejection of the discovered price by acquirers. Companies such as TTK Healthcare Limited and R Systems International Limited failed to meet the required tender threshold due to insufficient shares being tendered by public shareholders. Additional issues such as group bidding, lack of small shareholder participation, and promoter manipulation have also affected the RBB process.
SEBI’s Consultation Paper and Proposed Reforms
SEBI acknowledged these issues and, in its consultation paper, suggested allowing fixed price delisting offers under certain scenarios to mitigate the problem of excessively high discovered prices. The paper highlighted several inefficiencies and challenges associated with the existing RBB process. SEBI sought public and stakeholder feedback to evaluate the feasibility and potential benefits of the fixed price method. The consultation paper emphasized the need for a more predictable and straightforward delisting process that could address the concerns of all market participants, particularly retail investors.
Key Amendments in SEBI Delisting Regulations
Fixed Price to Include at Least a 15% Premium Over the Floor Price
One of the significant changes in the delisting norms is the mandate that the fixed price offered to shareholders must include at least a 15% premium over the floor price which is calculated in accordance with regulation 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This premium is designed to ensure that shareholders are compensated fairly and incentivized to tender their shares during the delisting process. Importantly, this reintroduction of the fixed price method applies specifically to companies with frequently traded shares.
Introduction of an Alternative Delisting Framework for Listed Investment Holding Companies (IHC)
Additionally, SEBI has introduced an alternative delisting framework specifically for listed IHCs. Under this framework, IHCs that have at least 75% of their fair value (net of liabilities) in direct investments in equity shares of other listed companies can transfer these shares proportionately to public shareholders. The IHCs are also permitted to make proportionate cash payments for other assets, such as investments in land, buildings, and unlisted companies. Upon the extinguishment of the entire public shareholding, the IHC will be delisted. This framework is intended to simplify the delisting process for IHCs and align it with their unique asset structures, providing a clearer path for delisting while ensuring compliance with relevant financial sector regulations.
Counter-Offer Mechanism
Under the RBB process, the acquirer has the option of making a counter-offer in accordance with regulation 22 of the Delisting Regulations. The threshold for making a counter-offer has been reduced from the existing 90% to 75%, provided that at least 50% of the public shareholding has been tendered. This change aims to simplify the process and make it easier for companies to achieve delisting, while still ensuring substantial public shareholder participation.
Additionally, the determination of the counter-offer price has been structured to protect minority shareholders. The counter-offer price must be at least the higher of the volume-weighted average price (VWAP) of the shares tendered or offered under the RBB process, or any indicative price offered by the acquirer. This ensures that the counter-offer price reflects fair market value, safeguarding the interests of public shareholders. Delisting is regarded as successful if promoter shareholding reaches 90% pursuant to RBB at the discovered price which is acceptable to the promoter.
Introduction of Adjusted Book Value as an Additional Parameter
Adjusted book value will now be used as an additional parameter for determining the floor price for frequently and infrequently traded shares of companies under the delisting framework. This excludes public sector undertakings from its purview.
Modification of Reference Date for Computing Floor Price
The reference date for computing the floor price under regulation 20(3) of the Delisting Regulations has been revised. Previously, the floor price was computed based on the date of the board’s approval of the delisting proposal. However, this has been modified to the date of the initial public announcement of voluntary delisting. This change aligns the delisting process more closely with the methodology used in the Takeover Regulations. These key changes in the delisting norms reflect SEBI’s commitment to creating a more balanced and transparent framework for voluntary delisting.
Concluding Remarks
The fixed price method introduced by SEBI offers a nuanced approach to balancing the interests of both investors and promoters in the delisting process. This method mitigates the extreme volatility and speculative trading often associated with the RBB method, providing a fairer and more predictable exit for investors. By setting a predefined exit price with a required premium, SEBI ensures that investors are adequately compensated without being subject to market speculation. This stability is particularly beneficial for retail investors who may not have the same risk tolerance or market insight as institutional players.
Additionally, the fixed price method fosters a more transparent and equitable market environment. By reducing opportunities for market manipulation and speculative trading, SEBI aims to maintain market integrity and investor trust. Promoters benefit from a streamlined process that reduces the risk of delisting attempts failing due to unanticipated price inflations.
This method also aligns with SEBI’s broader regulatory objectives of protecting minority shareholders while facilitating a conducive environment for business operations. By mandating a fair exit price, SEBI ensures that the interests of smaller shareholders are safeguarded, promoting a more inclusive and balanced market. This regulatory approach helps maintain investor confidence, which is crucial for the overall health and stability of the capital markets. Overall, the fixed price method represents a move towards more straightforward and transparent delisting processes, potentially leading to higher completion rates of delisting attempts and a more stable market environment for such activities.
– Ayush Gorana