Friday, November 21, 2014

SEBI Reforms – Part 2: Delisting

Delisting of securities tends to be somewhat controversial given that it represents the tension between the interests of the controlling shareholder who want to delist the company and the interests of minority shareholders who are caught between the options of exiting the company at the offered value or remaining in the company without the liquidity and protections that a stock exchange listing provides. These controversies have played out in the Indian markets as well thereby necessitating a review of the SEBI (Delisting of Equity Shares) Regulations, 2009.

The review commenced with SEBI’s discussion paper on the topic earlier this year. Somasekhar Sundaresan and I have separately analysed SEBI’s discussion paper (here and here, respectively). SEBI’s approach has been to address two broad concerns. First, the constraints and complexities in the delisting regime make it difficult for controllers to successfully delist. Second, public shareholders holding a significant stake can dictate terms as to the determination of the delisting price and thereby hold the other shareholders to ransom.

In the recently announced reforms, SEBI appears to have considered responses to the discussion paper. In tweaking the regime, SEBI has addressed one of the above issues, but not the other. The reforms continue to protect the interest of minority shareholders against both the controllers as well as significant public shareholders. On the other hand, it has arguably made it more difficult for controllers to delist their companies (rather than ease the process as it initially set out to do). An analysis of a few of the reforms would demonstrate this point further.

SEBI has reinforced the importance of the reverse book-building (RBB) process for delisting. While the RBB has arguably operated in favour of public shareholders, its rigidity has paid put to controllers’ delisting plans. It appeared from the discussion paper that SEBI may be willing to reconsider the utility of RBB in delisting, but in the end decided to stay with the option. Hence, it is unlikely that the new regime would make a significant difference to controllers’ delisting efforts. Although some of us had suggested alternatives to the RBB method that might facilitate value-generating delisting that might nevertheless protect the minority shareholders, that option does not appear to have found favour with SEBI.

Furthermore, the thresholds for delisting continue to be quite daunting. A successful delisting requires the satisfaction of two conditions: (i) the shareholding of the acquirer together with the shares tendered by public shareholders must constitute 90% of the total share capital of the company, and (ii) at least 25% of the number of public shareholders must tender in the RBB process.

As for the offer price, it would be determined through RBB and shall be the price at which the shareholding of the promoter, including the shareholding of the public shareholders who have tendered their shares, reaches the threshold limit of 90%.

At the same time, SEBI has undertaken some efforts relax some aspects of the process. For instance, the timelines for delisting have been reduced from approximately 117 working days to 76 working days. Public shareholders will benefit from taxation benefits accompany the proposal to use the stock exchange platform for delisting (which have also been extended to buyback and takeovers). Finally, exemptions have been carved out for small and medium-sized companies who are spared the strict norms for delisting.

A surprise inclusion in the reforms (that was conspicuously absent in SEBI’s discussion paper) is the streamlining of SEBI’s takeover regulations with the delisting regulations. It would now be possible for an acquirer who has made an offer under the takeover regulations to delist directly without increasing the public shareholding. This would ease the process for acquirers who wish to make an offer to the target’s shareholders and simultaneously delist the target if the offer is successful. It creates the badly needed symmetry between the regimes relating to takeovers and delisting. This recommendation made by the Takeover Regulations Advisory Committee (TRAC), which was ignored in the SEBI Takeover Regulations of 2011 and also in SEBI’s discussion paper on delisting, has finally seen the light of day.

In all, the reforms relating to delisting represent a mixed bag. The changes are incremental in nature, which do not affect the overall philosophy or address the broader concerns and tensions in delisting. Given this scenario, it is not clear if we will witness significant changes in the manner in which delisting is carried out in India or the type of problems faced. Again, we will have to await the text of the amendments to the regulations before making more detailed prognoses.

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