Strategic Exit or Regulatory Shortcut? Analyzing SEBI’s Special Delisting Route for PSUs with 90%+ Government Stake

[Vedansh is a student at Rajiv Gandhi National University of Law.]

On 18 June 2025, the Securities and Exchange Board of India (SEBI) approved amendments to the securities regulations at its 210th Board Meeting. One important change has been proposed to the SEBI (Delisting of Equity Shares) Regulations 2021 (Delisting Regulations) to permit certain PSUs, excluding banks, non-banking financial companies, and insurance companies, to voluntarily delist through a fixed-price mechanism, provided the Government holds at least 90% of the shareholding. This amendment marks a significant departure from the existing reverse book-building (RBB) framework and thus is in the preliminary stages of reshaping the landscape of PSU disinvestment in India.

This blog seeks to provide an analytical and critical narrative of the policy shift by examining the constitutional, economic, and legal implications of the new fixed-price route. It explores the rationale and possible implications on shareholder democracy and corporate governance, and places this shift within Indian and comparative regulatory contexts. Furthermore, the legitimacy of regulatory discretion implemented within the current framework is also questioned in the blog, raising critical questions about the long-term integrity of India’s capital markets.

Revisiting the Regulatory Architecture of Delisting

Generally, for PSUs, under Regulation 20 of the Delisting Regulations, the process of delisting of equity shares traditionally follows the RBB mechanism (provided in Schedule II of the Delisting Regulations read with Rule 21(3)(b) of the Securities Contracts (Regulation) Rules 1957), which was introduced to prevent coercive exists and let minority shareholders determine the exit price. Under the RBB, the final delisting price is determined by the bids received from public shareholders, thereby reflecting the concept of market consensus. However, this framework has been criticized as inefficient, susceptible to manipulation by speculative investors, and economically unsustainable by promoters, especially in companies with low public float and highly unpredictable trading volume, which may result in under - or overvaluation.

PSUs, most of which are listed in the government’s disinvestment agenda but continue to retain low public shareholding, often face the dilemma of being caught between the regulatory mandates of maintaining minimum public shareholding and, therefore, the impracticality of achieving successful delisting through RBB. This paradox has stalled disinvestment and discourages state participation. The recent framework by SEBI aims to end this stalemate by introducing a special dispensation that provides a fixed-price mechanism (Regulation 20A, as provided in a SEBI memo) of voluntary delisting in PSUs.

Examining the Normative Shift in SEBI’s Approach

The framework shifts from the participatory to procedural investor protection. Under the erstwhile-used participatory mechanism, minority shareholders were empowered to play a decisive role in price discovery through their collective bidding, thereby embedding the principle of shareholder democracy into the delisting process. Now, SEBI has opted for administrative efficiencies over market-based negotiation (by discovering the price), by eliminating the requirement for approval from two-thirds of public shareholders and substituting it with a fixed price approach. The current framework mandates the exit price to be set at a minimum of 15% above the newly defined floor price, based on a weighted average of past acquisition prices and a valuation carried out by at least two independent registered valuers.

This new approach aims to strike a balance between efficiency and fairness, but it also introduces concerns about informational asymmetries and valuation subjectivity. The reliance on independent valuers raises the questions of under-valuation, particularly in PSUs that possess strategic assets or large undervalued land banks. The fixed-price regime lacks the bidding process, which precludes the possibility of price enhancement through competitive tension, hence potentially short-changing minority shareholders. Thus, this recent shift has legal and constitutional ramifications, particularly in relation to the Supreme Court’s jurisprudence on the transparent and equitable disposal of public assets. However, SEBI explicitly justified this move because the RBB is ‘impracticable’ where promoter shareholding already equals/exceeds 90% (para 5.3.2, SEBI memo).

Implications for Minority Shareholder Rights and Corporate Governance

One of the key elements of Indian corporate law, particularly for listed companies, is the protection of minority shareholders’ interests. The mandatory public shareholder approval under Regulation 11 of the Delisting Regulations has been considered a foundation of this protection. The significance of this shareholders’ protection is diluted by the recent SEBI amendment, which waives the consent requirement outright in the case of eligible PSUs. This raises concerns regarding the erosion of participatory governance, since the state (in PSUs), as the controlling shareholder, is both the regulator and the beneficiary of the delisting process.

The recent framework creates a precedent for differential regulatory treatment based upon ownership structures. Whereas private companies face stricter RBB; PSUs get relaxations in the name of public interest. This bifurcation challenges the uniformity in enforcing the securities regulations and poses doubts about the parity and neutrality of the regulations. Besides, there is no robust appeal or review mechanism, and public shareholders are left with limited recourse in the cases of undervaluation or procedural unfairness.

Strategic Disinvestment and the Political Economy of Exit

In the context of the political economy of strategic disinvestment, this amendment has shifted India’s disinvestment policy from minority stake sales to complete exits in non-strategic PSUs. It enables faster disinvestment without being  stalled by procedural obstacles that have historically hindered the process.

However, the removal of the market-based price discovery mechanism in favour of administrative pricing mechanisms will have to be questioned in light of constitutional economic principles. In paragraph 76 of Centre for Public Interest Litigation v. Union of India, the SC underscored the need for a transparent and rational method in dealing with public assets. Although SEBI’s new framework tries to establish valuation safeguards, the absence of a competitive price determination process may still make it vulnerable to judicial scrutiny. Furthermore, transfers of strategic assets likely raise concerns of national interest, regulatory oversight, and stakeholder participation. If the price discovery process lacks transparency, such concerns may lead to greater judicial scrutiny and policy resistance, in turn prompting the courts to examine whether administrative discretion has been exercised duly and in line with the constitutional principles of non-arbitrariness and fairness.

Comparative Perspectives and Jurisdictional Analogues

It has been observed that in foreign jurisdictions, regulations surrounding delisting processes are likely to encapsulate two objectives: (i) to maintain market integrity and (ii) to protect the rights of the investors, especially in cases involving state-owned enterprises.

In the United Kingdom (UK), under the Listing Rules and the UK Corporate Governance Code, delisting requires the approval of 75% of shareholders, accompanied by extensive disclosures. However, in the case of assets owned by the public sector, the UK government typically mandates a structured sale process, often through competitive bidding/auction. Such mechanisms promote transparency and maximum value realization, and minimize the risk of underpricing of state assets.

In contrast, China’s approach to delisting state-owned companies has historically leaned toward discretionary administration, although it has recently been modified to incorporate market-based considerations. The reforms under the State-Owned Assets Supervision and Administration Commission to mitigate the social costs of strategic exits include measures such as employee compensation, reemployment programs, and obligatory social contributions. The two-fold role of the state as both an economic actor and a social protector is reinforced in such reforms.

Singapore provides a hybrid model, applicable to both public and private companies, for reviewing delisting proposals by independent financial advisers (IFAs). However, the minority shareholders have the right to access those reports before making an informed decision to vote. In instances of contentious delisting scenarios, the Singapore Exchange requires enhanced disclosure and allows shareholders to seek redress through the Singapore Mediation Centre or judicial review under the Companies Act.

In comparison, the Indian framework presently lacks an institutionalized ex-ante or ex-post mechanism. Neither SEBI nor the stock exchange have a formal process that allows public shareholders to raise concerns regarding irregularities in valuation or procedural failures in the delisting of PSUs under the special route. The absence of such avenues threatens to undermine the procedural legality, especially where a disputed exit price exists. Incorporating elements such as an IFA review, shareholder grievance redressal forums, and a time-bound appeal mechanism could strengthen the legitimacy of India’s evolving delisting jurisprudence. Therefore, India’s framework diverges from foreign practices, relying solely on valuation standards and statutory carve-outs without an embedded mechanism for grievance redressal.

Conclusion

The special delisting framework for PSUs with 90% or more government shareholding represents a pivotal moment in the evolution of Indian securities regulations. It addresses India’s regulatory and fiscal disinvestment dilemmas. The proposed framework is normatively warranted as a pragmatic tool for unlocking public value. However, its ultimate success will depend on the successful practical implementation, transparency in the valuation process, and the preservation the rights of the minority.

This framework rests heavily on procedural fairness and fiduciary accountability, given the absence of price discovery, shareholder consent, and government discretion must be exercised with transparency, especially for public assets. India’s persistence in liberalizing its capital markets must be followed in light of the foundational principles of investor protection and participatory governance.

Thus, the special delisting route approved by SEBI is not merely a regulatory innovation but is also a litmus test for the integrity of India’s market institutions. Its success will be determined not by the number of delisting it has facilitated but by the investors’ confidence in the transparency of the process and the public’s trust in the credibility of Indian capital markets.