Saturday, November 7, 2015

SEBI Order on Delisting Price

Delisting transactions tend to be sensitive as they underscore the conflicts between controlling shareholders (or promoters) and minority shareholders. The promoters are in a position to delist the company at any time they consider appropriate even though the circumstances may not necessarily favour the minority shareholders. Moreover, due to the information asymmetry between the two groups of shareholders, the promoters may seek to benefit at the cost of the minority shareholders. In other words, given the superior levels of information possessed by promoters, they can choose to delist at a time when they may have to pay the minority shareholders the lowest possible price.

However, the SEBI (Delisting of Equity Shares) Regulations, 2009 as amended in 2015 (the “Delisting Regulations”) seeks to assuage the concerns of minority shareholders by not only setting out an elaborate process for delisting but also by enabling price discovery through the “reverse bookbuilding” process. In certain situations, such protections may not be adequate due to unforeseen circumstances, especially if the price discovery process has been completed without the availability of all relevant information to the bidding shareholders. One such scenario played out in a recent case where SEBI intervened with an order issued yesterday.

In this case, the promoters of Essar Oil Limited who hold a majority stake sought to delist the company by acquiring the remaining 27.53% shares from the minority shareholders. Although the delisting process was initiated in 2014, it was delayed until 2015 (and after the amendments to the Delisting Regulations came into force). The promoters approached SEBI for dispensing with delays from giving effect to various procedures under the Delisting Regulations. Although the timing issues are less relevant for the purposes of this post, the question of delisting price acquired great emphasis in SEBI’s analysis.

In August 2014, after the delisting process was initiated, SEBI received a complaint stating a lack of transparency on the part of the promoters of the company, especially regarding the fixation of the floor price required for carrying out the reverse bookbuilding. In particular, it was stated that the promoters of the company had entered into an agreement with OJSC Roseneft Oil Limited, a Russian company, to sell 49% of their stake in the company. A request was made to SEBI to ensure that the delisting price took into account the price at which the promoters were to sell their stake to Roseneft, which price was not disclosed to the market. The promoters stated that the price of the sale to Roseneft was still in discussion and not finalised. In any event, the promoters of the company were willing to make good the difference between the delisting price and any higher price they may receive under the transaction with Roseneft within a period of one year from the delisting. However, a question also arose as to whether such an outer time limit would be appropriate for the purpose of paying the differential.

After consider the facts, SEBI passed the following order:

(a)        The promoter shall expeditiously make the public announcement and specifically mention therein and in the letters of offer that (i) the floor price shall be in accordance with the amended Delisting Regulations and (ii) that in case the price offered/paid by Roseneft is higher than the discovered price arrived at in the reverse bookbuilding, the difference in price shall be paid to the shareholders who tendered their shares to the promoters in accordance with the Delisting Regulations in the proposed offer; …

Provided that, notwithstanding any delisting of equity shares of the Company, the promoter/s of the Company shall be responsible to pay the difference between the transaction price with Roseneft and the final delisting price to those shareholders whose shares were accepted in terms of the Delisting Regulations, if the former is higher. In this regard, the Company/its promoters shall, on finalization of the transaction with Roseneft, make a public notice, within a period of 10 days of such finalization, under intimation to SEBI, stating the details of the transaction including number of shares to be purchased by Roseneft and the consideration (including all heads under which the final consideration price is arrived at between the promoter/s and Roseneft) finalised with Roseneft: …

Through its order, SEBI has pegged the delisting price to any price that the promoters may finalize with Roseneft even through that transaction may occur subsequent to the delisting, and that too without prescribing any time limit. Hence, minority shareholders will benefit from the Roseneft transaction and share in any premium because that is pending consideration at the time of delisting.

Overall, such an approach by SEBI addresses the information asymmetry problems between promoters and minority shareholders that are accentuated in transactions such as delisting and squeeze outs. In the present case, the asymmetry was addressed as the matter was brought to SEBI’s attention by a complainant. In other situations where the promoters initiate a similar transaction such as the one with Roseneft after completion of the delisting, it is unlikely that a similar price protection will be available to the minority shareholders. Hence, the timing of the promoter transaction seems crucial. In the long term, one possible solution would be to allow the exiting shareholders to enjoy the economic benefits of transactions involving the company or the promoters that may be undertaken during a period following the delisting, as discussed in this paper.

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