India: Tracker – Dissecting SEBI's Proposed Changes To Delisting Norms

The Securities and Exchange Board of India ("SEBI"), on August 14, 2023, released a Consultation Paper on the Review of Voluntary Delisting Norms under the SEBI (Delisting of Equity Shares) Regulations, 2021 ("the Paper"). The Paper proposes to rejig the existing reverse book building process under the SEBI (Delisting of Equity Shares) Regulations, 2021 ("Delisting Regulations") and introduce a fixed price mechanism as an alternative pricing method. The proposals are intended to align the regulatory framework with market realities and enhance efficiency.

The proposals in the Paper have been discussed in greater detail below.

(1) Review of the Reverse Book Building Process

The Paper proposes a number of substantial modifications to the existing reverse book building process.

For the uninitiated, the reverse book building process involves the tendering of shares and submission of bids by public shareholders during the offer period. On closure of the offer, the bids are relied on to determine the price, when the total shareholding of the acquirer, factoring in the shares tendered by shareholders ("Post Offer Shareholding"), equals 90% or more of the total issues shares. In case the acquirer's Post Offer Shareholding does not reach 90%, the delisting offer is deemed to have failed. When the latter condition is met, the price arrived at, termed as the discovered price, is the price at which shares are accepted through eligible bids. On acceptance of the discovered price by the acquirer, the delisting offer is deemed successful.

In case the discovered price is not acceptable to the acquirer, the acquirer may make a counter-offer, provided the price offered is equal to or more than the book value of the company. The counter-offer is considered successful if the Post-Offer Shareholding of the acquirer meets the 90% threshold.

(a) Counter-Offer Framework

Under the Delisting Regulations, acquirers are only eligible to present counter-offers if their Post-Offer Shareholding amounts to at least 90% of the company's total issued shares. This requirement allows for majority shareholders to influence the process, and leaves room for the potential failure of a delisting offer, even in scenarios where a majority of the public shareholders may, in fact, favour the delisting proposal. Such failure also has the knock-on effect of depriving acquirers from the opportunity of making a counter-offer. Moreover, the Paper also notes the absence of any guiding factors while determining the counter-offer price, except the book value of the company as the baseline requirement.

Reduced eligibility thresholds

To address the above concerns, the Paper proposes to lower the thresholds for making a counter-offer. As per the proposal, an acquirer will be eligible to make a counter-offer in two eventualities – firstly, if the discovered price is not acceptable to the acquirer, and secondly, if the Post-Offer Shareholding of the acquirer does not meet the 90% threshold. In the aforementioned scenarios, the acquirer will be allowed to make a counter-offer if the bids received are higher than the higher of: (a) the difference between the acquirer's shareholding and 75% of the company's total issued shares; and (b) 50% of the public shareholding.

Determination of counter-offer price

With regard to counter-offer price, the Paper adopts the approach of linking the method of price determination to the general expectation of public shareholders. The Paper proposes that the counter-offer price must surpass the higher of the two minimum pricing benchmarks provided below:

In relation to (i) above, the Paper further clarifies that if the acquirer's Post-Offer Shareholding is less than 90%, all shares tendered shall be considered while calculating the VWAP. In the event, the Post-Offer Shareholding meets the 90% threshold, the VWAP will be calculated by considering the shares tendered up to 90%. The VWAP shall be disclosed within 2 hours of the closure of the bidding period. Pursuant to the above, if the acquirer chooses to make a counter-offer, all public shareholders will be given the opportunity to tender their shares for a period of 5 days.

(b) Determination of Floor Price

The floor price refers to the minimum price that the acquirer is bound to pay the public shareholders for the shares tendered. Under the Delisting Regulations, the floor price must be computed in accordance with Regulation 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Regulations").

In this context, the Paper identifies the specific parameters under Regulation 8 of the Takeover Regulations that will apply while determining the floor price of frequently and infrequently traded shares. Additionally, the Paper also proposes to introduce 'adjusted book value' as an additional parameter to protect the interest of shareholders, by accounting for the fair market value of a company's assets while computing the floor price. The manner of calculating the adjusted book value has also been discussed at length. However, it has not been discussed in this piece for the sake of brevity.

(c) Determination of Reference Date

Under the Delisting Regulations, the floor price is calculated based on a reference date, i.e., the date on which the exchanges are required to be notified of the board meeting in which the delisting proposal was approved. In this context, the Paper notes that the interval between the public announcement of the delisting proposal by the acquirer or prior intimation to exchanges in promoter led delisting, and the date on which exchanges are notified, carries the risk of abnormal trading activity which may disturb the calculation of the floor price.

To tackle this issue, the Paper makes a case for calculating the floor price as on the date when information related to the proposed delisting is publicly disclosed for the first time, or based on an 'undisturbed price'. Accordingly, the reference date is proposed as the date of the initial public announcement or the date on which prior intimation is given to the exchanges, as applicable.

(2) Introduction of a Fixed Price Mechanism

At present, the Delisting Regulations provide for the reverse book building process as the sole price determination mechanism for voluntary delisting. In what has been hailed as a much-awaited move, the Paper proposes the introduction of fixed price mechanism as an alternative to the reverse book building process. The above proposal seeks to allay concerns regarding the inherent price uncertainty associated with the reverse book building process and the resultant increase in volatility and speculative activities in the scrip of the company. The idea is to empower shareholders to decide upfront whether to tender their shares at the given price and increase visibility of the funds required, so the acquirer may make prior arrangements.

The proposed fixed price mechanism shall only be available to companies whose shares are frequently traded in accordance with the Takeover Regulations. In terms of pricing, the fixed price offered shall not be lower than the floor price computed under the Delisting Regulations, and the delisting offer shall be considered successful if the Post-Offer Shareholding meets the 90% threshold. Further, acquirers or promoters which have opted for delisting in the past, but haven't been successful, will be allowed to make a delisting offer through the fixed price mechanism, after the stipulated cooling off period. The Paper retains other procedural requirements under the Delisting Regulations (e.g., opening of escrow account, filing of letter of offers, etc) for the fixed price mechanism.

Our View

The seamless exit of listed companies from the public market is one of the many hallmarks of an efficient securities market. However, given the track record of failed delisting offers, the existing delisting process in the Indian securities market is far from efficient.

Considering the same, the proposals put forth in the Paper are a commendable step towards streamlining the delisting process. A recurrent theme seen across the proposals is the focus on creating an ecosystem that enhances the chances of a delisting offer being seen all the way through. This is sought to be done by minimizing external influences, such as the influence of majority shareholders, speculative trading activities and market volatility, reducing friction and redesigning the process to suit shareholder expectations. The changes proposed to price computation methods also seem to be directed at securing a reasonable exit for public shareholders. In summary, there is little room to criticize the proposals which are targeted towards eliminating the subjectivity and uncertainty associated with the delisting process. The introduction of a fixed pricing mechanism has also been long overdue, and called for by market participants. While this broadly can be seen as a positive measure, the practical realities and challenges surrounding such mechanism remain to be seen.

The contents of this article should not be construed as legal opinion. Recipients should take independent legal advice before acting on any views expressed herein. The comments in the article are as of the laws prevalent on the date the article was originally published. The views stated in the article are not binding on any authority or court, and so, no assurance is given that a position contrary to that expressed herein will not be asserted by any regulatory authority/courts. For any further queries or follow up, please contact Finsec Law Advisors.