[Sahsransh and Varun are students at Gujarat National Law University.]
On 14 August 2023, the Securities and Exchange Board of India (SEBI) released a consultation paper on the review of voluntary delisting norms under SEBI (Delisting of Equity Shares) Regulations 2021 (Delisting Regulations). This step is taken by SEBI to make the delisting norms more robust, efficient, transparent and investor-friendly.
The Delisting Regulations were amended in 2021 with the aim of replacing the outdated standards and mechanisms, and to enhance the effectiveness of delisting offers. However, the regulation has failed to achieve its intended objective and continues to encounter issues of market manipulation and artificial inflation of share prices. The inherent flaws in the delisting mechanism lead to the failure of delisting offers, as only 6 out of 16 delisting proposals succeeded in crossing all the hurdles.
This prompted SEBI to review the delisting regulations to align the regulatory framework with market realities to enhance its efficiency and promote ease of doing business.
Overview of Existing Norms
Delisting is a process whereby the company attempts to remove its equity shares listed on the stock exchange. Pursuant to approval by the board of directors and the shareholders, the acquirer initiates the reverse book building (RBB) process, where it gives an indicative price that is generally higher than the floor price.
The RBB is in the form of a bid to determine the discovered price upon which the public will tender its shares. The discovered price is determined at the price, which takes the post-delisting shareholding of the acquirer to 90%. After price is discovered, the acquirer is left with the option of either accepting or rejecting the price.
In case the acquirer accepts the price, the delisting offer is successful if it meets the 90% threshold. In case the acquirer does not accept the price, the acquirer is entitled to make a counter-offer, which has to be equal to, if not more than, the book value of the shares. However, the acquirer can make a counter-offer only if the post-offer shareholding of the acquirer mandatorily reaches 90%. If the public accepts the counter-offer, the delisting is successful, else it fails.
What is the Rationale behind the Changes?
The outdated RBB process acts as one of the major impediments in delisting offers as it gives disproportionate powers of some shareholders. Majority of delisting offers, such as TTK Healthcare Limited, Vedanta Limited, INEOS Styrolution and Lindie, failed due to such manipulation and influence by the shareholders who demand unreasonably high prices for tendering their shares. The acquirer tends to reject such high prices, leading to the non-compliance of the requisite 90% threshold for a successful delisting.
Further, the acquirer is unable to make a counter-offer as it fails to meet the crucial 90% threshold, which is mandatory for making a counter-offer. Therefore, the increasing instances of price manipulation, along with the inability of the acquirer to make a counter-offer, act as major impediments in the process of delisting.
Furthermore, the previous regulation failed to provide a reasonable and effective mechanism for determining the counter-offer and the floor price, which is necessary to safeguard the interests and general expectations of public shareholders. These drawbacks have prompted SEBI to bring reforms in Delisting Regulations, leading to a more robust and investor-friendly regime.
What Does the Consultation Paper Entail?
SEBI has proposed the following changes in the existing regulations with the objective to remedy the above-mentioned concerns.
Counter-offer threshold
The proposal reduces the threshold for making a counter-offer. It provides that the acquirer can make a counter-offer in two conditions - where the acquirer does not accept the discovered price, and where the acquirer does not meet the 90% threshold. Upon the satisfaction of either of the two conditions, the acquirer will be able to make a counter-offer only if the bids received are higher than the higher of either the difference between the acquirer’s shareholding and 75% of the company’s total issued shares, or 50% of the public shareholding.
Counter-offer price
The proposal introduces a framework for determining the counter offer. It proposes that the price at which the counter-offer must be made should be more than the higher of volume weighted average price (VWAP) of the shares tendered, and the initial floor price disclosed and calculated for RBB.
However, the VWAP is calculated differently in the eventuality that the 90% threshold is reached or not. The proposal provides that if the post-shareholding is less than 90%, VWAP will be calculated taking into account all the shares tendered, while if it is more than or equal to 90%, the VWAP will be calculated taking into account shares tendered up to 90%. Further, the offer will be given within 2 hours of closing of bidding process and remain valid for 5 days, during which all the shareholders can tender their shares.
Floor price
The proposal identifies certain parameters under Regulation 8 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Code) for the determination of floor price. These are classified on the basis of ‘frequently traded shares’ and ‘infrequently traded shares’ as defined under the Takeover Code. The proposal adds ‘adjusted book value’ as a new parameter to the existing ones. It further provides for the manner in which floor price and adjusted book value is to be determined and calculated.
Reference date
The proposal changes the meaning of the date to be used as ‘reference date’, which under the proposed changed will be the date on which the first public announcement is made or the date on which prior information of delisting is to be given to stock exchanges.
Fixed price mechanism
The proposal provides an alternative to RBB. This alternative is the fixed price mechanism, whereby the acquirer can provide an exit opportunity to the shareholders through delisting at a fixed price, provided that the shares of the company are frequently traded. The proposal states that the fixed price shall not be less than the floor price, and the delisting shall be successful only when the 90% threshold is reached on such fixed price.
Analysis: A Step in the Right Direction?
The securities market encounters a spectrum of issues, spanning from safeguarding the interests of investors to ensuring sound corporate governance. Among these concerns, failure of delisting offers pose substantial risk to the efficient and smooth functioning of securities market. These failures have the potential to erode the confidence of investors in the company, and increase market volatility over the share prices of company. Simultaneously, they trigger apprehensions over the financial health of the company and its ability to execute strategic plans.
SEBI faces the challenge of balancing efficient capital allocation and value-adding public merger and acquisition transactions for companies, while ensuring fairness for public shareholders during buyouts. Unfortunately, the current RBB route is outdated, and it lacks fairness and is susceptible to price manipulation.
The proposal aims to rectify these issues by introducing a more equitable and reasonable process for offering buyouts to the public shareholders. It establishes clear standards for determining counter-offer and floor prices, lowers the threshold for making counter-offers, and offers a fixed price mechanism as an alternative to RBB.
Leading jurisdictions like USA, Hong Kong, and Singapore also allow alternate delisting mechanisms instead of mandatory RBB. For instance, in the USA, companies can delist by providing fixed price exit offers to shareholders subject to approval of board of directors and majority of minority shareholders. Similarly, Hong Kong and Singapore allow voluntary delisting by fixed price exit offer upon obtaining 90% shareholder acceptance of the offer.
The proposed framework streamlines the delisting process, making it more efficient and in line with market expectations. Nevertheless, it is crucial to establish robust safeguards for minority shareholders, based on the global best practices. For instance, fixed-price delisting should be limited to actively traded shares with a significant public float to ensure accurate price determination. Additionally, the proposed formula for counter-offer pricing should incorporate the open market price to safeguard minority shareholders' interests.
As a result, the proposed reforms will ease the financial burden on acquirers who previously faced inflated delisting prices under the RBB process. This change means that major delisting offers, which may have failed due to these inflated prices, now have a better chance of successful delisting, ultimately injecting liquidity into the market. Consequently, the revised framework will reinvigorate the securities market, promoting its efficiency and smooth functioning.
Suggestions and Recommendations
The proposed framework can accommodate several amendments, including the introduction of a comprehensive framework for promptly acquiring the residual shares from shareholders following a successful delisting. This framework should offer shareholders multiple buy-out options, such as squeeze-outs, to ensure their protection and provide them with assurance regarding their shares.
Moreover, it should define a specific timeframe within which the delisted company must settle the differential price for shares if the company engages in an M&A transaction. Currently, due to Essar-Oil Rosneft case, the company has to make such payment of the differential price to shareholders in case it enters into an M&A transaction at a price higher than the delisted price. However, there is no particular cooling period prescribed by the regulations, in the absence of which confusion and uncertainty reign over the company in entering into such transactions.
Conclusion
The proposed changes, although open to further amendments, continue to underscore the significant and commendable role of SEBI in ensuring the smooth and efficient functioning of the securities market. The changes to the existing framework will make merger and acquisition deals for listed companies a more logical and investor-friendly process, harmonizing the interests of all stakeholders involved.
These proposed reforms will bring the existing regulations in line with the evolving market dynamics and expectations, thus serving as a catalyst to streamline the delisting process. Ultimately, resulting in more successful delisting offers, and improving the ease of doing business in India.