[Vanshika and Ishita are students at Symbiosis Law School, Pune.]
Delisting refers to the removal of a company's shares from being traded on a stock exchange, effectively making the company as an unlisted public entity or a private company as the case maybe. However, this process is often fraught with challenges, with two of the primary reasons for delisting failure being the insufficient tender of shares by public shareholders following the counter-offer and an unrealistically high discovered price.
The failure of Vedanta Limited to delist its securities in 2020 was one of the classic examples of why delisting usually fails. This was mainly because they could not achieve the required threshold of shares to be tendered for the delisting to be successful due to high discovery price. It is intriguing that the majority of the proposals were placed at INR 320 per share for the delisting, despite the fact that the delisting price was INR 87.5.
Recently, the Securities and Exchange Board of India (SEBI) in its board meeting introduced some amendments to the delisting process with the aim to overcome such shortcomings. This article discusses the amendments in the voluntary delisting process (Delisting Amendments) which aim to streamline the process of delisting a company from stock exchanges, thus enhancing the overall business environment and protecting investor’s interests.
Understanding the Amendments
Introduction of floor price method: An alternative to the reverse book building process
As per the current Delisting Regulations, the price discovery for the delisted shares is conducted as per the reverse book building process (RBB). RBB is a process to determine the offer price for the acquisitions of equity shares from the public shareholders. This process includes the acquirer company making a detailed public announcement indicating the floor price and the offer price. After making such announcement, the public shareholders have the option to suggest an exit price that can match or is higher than the offer price provided by the listed company to purchase such shares by delisting.
With the introduction of the Delisting Amendments, SEBI has introduced an alternative method to the RBB process, known as the fixed price method for the companies whose shares are frequently traded. This method proposes that the listed company shall offer a fixed price which is at least 15% premium over the floor price as the offer price during the detailed public announcement instead of following the price discovery route through RBB.
While in the RBB process, shareholders have a direct role in price discovery by suggesting an exit price, the fixed price technique eliminates the aspect of participation and provides certainty in the price. The fixed price method streamlines the delisting process by reducing the steps involved in price discovery. This can lead to quicker and more efficient delisting transactions, reducing administrative and compliance burdens for companies.
However, fixed price can raise about issues regarding if the such price adequately describes or reflects the actual value of market shares especially in cases of market volatility. Therefore, SEBI must continuously supervise such type of delisting and revise such premium rate from time to time as per market conditions.
Adjusted book value for frequently and non-frequent traded companies
Additionally, SEBI has introduced an additional parameter for determining floor price for frequently and infrequently traded shares of the companies excluding PSUs. This method is known as adjusted book value method, wherein the floor price is inclusive of the book value of the assets and liabilities for the shares whose market value cannot reflect the true picture. This aims to provide the investors a more realistic price for investors and reduce market manipulation in the delisting process.
Moving up the reference date for determining floor price
The third major amendment introduced by SEBI is the changing of the reference date used for determining the floor price. Before the delisting amendments, , the reference date for computing the floor price was the date at which the listed company was required to notify SEBI about the board meeting approving delisting proposal. With the introduction of the Delisting Amendments, the reference date for computing the date of floor price has been moved up to the date of initial public announcement similar to the Takeover regulations.
Let us take a deeper dive into understanding what impact this shall have. According to Regulation 10 of the Delisting Regulations, the board meeting that approves the delisting must take place within twenty-one days of the initial public announcement notification. This process entails the selection of a Peer Review Company Secretary who assesses the acquirer's adherence to Regulation 4(5). Typically, the acquirers make full use of a 21-day period to conduct these meetings.
Considering the time sensitivity and market volatility of stock markets, there is a significant time gap between the board meeting and the public announcement (21 days) which gives potential for market manipulation or insider trading, affecting the floor price. With the implementation of this amendment, shareholders will have the opportunity to obtain a fairer valuation for their shares, since it decreases the chances of manipulation or the acquirer gaining a time advantage. Thus, potentially providing better return to shareholders.
To better understand this, let us understand this with an illustration; For example, if Company A Ltd. intends to delist its shares from all the stock exchanges it is listed on, as per the new regulation, as soon as A Limited announces its intention to delist, the reference date for calculation of floor price is locked in, as opposed to the date as per the earlier regulation, wherein the board meeting reflected the market's reaction to this news . Since the price is locked in without any delay, this ensures a fairer price for shareholders for A Limited.
Reduction of threshold in making a counter offer
During the RBB process, the acquirer has the option of submitting a counter-offer in accordance with Regulation 22 of the Delisting Regulations. In the event that the purchaser deems the proposed discovered price to be objectionable, a counter-offer is submitted. However, the counter-offer price is not permitted to be less than the company's book value. Currently, the Delisting Regulations allow an acquirer to submit a counter-offer only if the post-offer shareholding of the acquirer, in addition to the shares tendered in the delisting offer, exceeds 90% of the total issued shares. This has resulted in instances where the delisting offer is fruitless due to the absence of the necessary threshold requirements, despite the fact that the majority of public shareholders have tendered their shares and are in favour of the delisting.
On the other hand, under the Delisting Amendments, the acquirer may submit a counter-offer if the post-offer shareholding reaches 75% through the RBB price discovery process. It is necessary that at least 50% of the public shareholders have tendered for the same. However, the delisting would only be effective if the acquirer's aggregate shareholding after the offer reaches 90%. The counter-offer price must not be less than the greater of the following: (a) the volume-weighted average price of the shares tendered/offered; and (b) the indicative price, if any, offered by the acquirer.
This amendment provides companies with the capacity to demonstrate flexibility, particularly in scenarios where shareholders tender their shares but the 90% threshold is not met, resulting in abortive delisting attempts. However, it preserves this flexibility by mandating that 90% of the total shares be delisted, thereby preventing any potential manipulation or forced delisting against the will of shareholders. It is projected that this modification will facilitate more successful delistings in the future, thereby reducing unnecessary regulatory barriers. SEBI must maintain its administration of companies to ensure that they comply with the regulations' intent, in order to protect investor interests and promote corporate flexibility in market deviations.
Conclusion
The most recent amendments to SEBI's delisting regulations are designed to reduce the challenges that are associated with the delisting process, thereby improving its efficacy and protecting the interests of investors. SEBI has improved the predictability and transparency of the RBB process by incorporating alternative methods, such as adjusted book value and fixed price methods, to determine floor prices. By lowering the counter-offer threshold and relocating the reference date for price calculation, the risk of market manipulation is also reduced, thereby guaranteeing that shareholders receive equitable valuations. The success of these amendments in the future will be contingent upon SEBI's vigilant supervision and timely revisions to reflect market realities. Investor protection remains a top priority; however, the potential for more successful and simplified delisting may encourage companies to consider delisting. The equitable treatment of shareholders in a fluctuating market setting, as well as the equilibrium between corporate requirements, will necessitate the continuous assessment and adaptation of these regulations.
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