Background
The Securities and Exchange Board of India (‘SEBI’) issued a Press Release[i] summarising the discussions from the recently concluded SEBI board meeting (‘BM’). During this BM, the SEBI proposed amendments under the SEBI (Delisting of Equity Shares) Regulations, 2021 (‘Delisting Regulation’) in order to introduce a fixed price process (‘FPP’) as an alternative to reserve book building (‘RBB’) Process. Before delving into the press release and understanding the proposed amendments, it is imperative to understand the background.
What is the delisting of securities?
Delisting means removing securities of listed companies from the stock exchange (‘SE’). Delisting can occur either voluntarily or compulsorily.
Voluntarily delisting occurs when a company decides on its own to remove its securities from the SE. Compulsory delisting means removal from the SE as a penal measure for not making any submissions or complying with various requirements set out in the Listing agreement within the prescribed time frames.
How is the price determined once there is a voluntary delisting of securities?
Under the current conditions, when an acquirer intends to make an offer to delist the equity shares of a company from the recognized SE, they are required to provide an exit opportunity to all public shareholders in accordance with Chapter Six of the Delisting Regulations. Currently, the exit price is determined by the RBB.
What is RBB?
In the RBB process, the acquirer must provide an indicative price higher than the floor price. Shareholders are then required to tender their shares through the SE mechanism, with the bidding period remaining open for five working days.
If the post-offer shareholding of the acquirer, along with the shares tendered/offered by the public shareholders, does not reach 90%, the delisting offer is considered to have failed. The discovered price shall be determined if the post-offer shareholding reaches 90%. If the acquirer does not accept the discovered price, they have the option to make a counteroffer. The price at which the counter-offer is made shall not be less than the book value of the company.
Faults in RBB
Currently, the delisting process can only be successful if the RBB process is completed. However, if the aggregate post-offer shareholding of the acquirer, along with the shares tendered by the public shareholders, does not reach 90% of the total issued shares of the company, the delisting process fails. This may lead to the failure to delist shares. In such cases, the acquirer does not have the option to make a counter-offer, as there is no provision for it, and the acquirer must wait another six months to make another delisting offer.
What is FPP?
Companies opting for this method must set the minimum price at the floor price, as stipulated under the delisting regulations. Additionally, they must include a 15% premium above the floor price.
The proposed amendments to be made under the Delisting Regulations
The objectives of the enactment were to facilitate ease of doing business, protect investors' interests, and provide flexibility in the voluntary delisting framework. In view of the same, the SEBI made the following recommendations:
a. The introduction of FPP as an alternative to RBB for delisting of companies whose shares are frequently traded. The FPP offered by an acquirer shall have at least a 15% premium over the floor price as determined under the Delisting Regulations.
b. Introduction of an alternate delisting framework for listed investment holding companies (‘IHC’) through a scheme of arrangement by way of selective capital reduction. Wherein a listed IHC with 75% of their fair value (net of liabilities) comprising direct investments in equity shares of other listed companies shall be permitted to transfer the underlying equity shares held by other listed companies to its public shareholder proportionately. It will also be permitted to make proportionate cash payments to its public shareholders against other assets, including investments in land, buildings, unlisted companies, etc.
c. Once the entire public shareholding is extinguished, the IHC shall be delisted. The delisting of the IHC shall comply with any requirements specified by its financial sector regulator.
d. Modification of Counter- Offer mechanism in case of delisting through the RBB process:
The threshold for making a counter-offer has been reduced from 90% to 75%, provided 50 % of public shareholding has been tendered.
The counteroffer shall not be less than the higher of (i) the volume weighted average price (‘VWAP’) of the shares tendered/offered under the RBB process, (ii) the indicative price, if any, offered by the acquirer.
The delisting would be successful only when the post-offer aggregate shareholding of the acquirer reaches 90%.
e. Adjusted book value is introduced as an additional parameter for determining the floor price for frequently and infrequently traded shares of companies under the delisting framework, except for public sector undertaking (‘PSU’).
f. The reference date for computing the floor price has been modified from the existing requirements of the SEBI approval to the date of initial public announcement for voluntary delisting, as in the case of the takeover regulations.
Conclusion
It is explicitly clear that the proposed amendments to the Delisting Regulations aim to ease business processes and protect investors' interests. The introduction of the FPP as an alternative method to the RBB provides flexibility for investors to exit the company. However, there are certain challenges as well. For instance, the 15% premium offered depends on prevailing market conditions and the company’s valuation. Additionally, the hurdle of 90% acceptance remains a challenge, impacting the success rate of delisting.
End Note
[i] Sebi Board Meeting Press Release No. 12/2024, Dated 27-6-2024.
Authored by Kushagra Gahlot, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
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