SEBI

SEBI Voluntary Delisting Norms Review

SEBI has issued Consultation Paper Review on Voluntary Delisting Norms under SEBI’s Delisting of Equity Shares Regulations, 2021. The consultation paper dives into the objectives, backgrounds, sub-group constitution, proposals, and public involvement in shaping SEBI’s evolving framework.

Objective

The objective of this consultation paper is to seek comments/views/suggestions from the public on some aspects regarding voluntary delisting under SEBI (Delisting of Equity Shares) Regulations, 2021 (“Delisting Regulations”).

Background

Delisting Regulations provide an exit opportunity for the acquirer to all the public shareholders in case the company’s equity shares are sought to be delisted from all the recognised stock exchanges in which they are listed. The exit opportunity is determined at the price arrived when the cumulative shareholding of the acquirer, along with the shares tendered/offered by the public shareholders, reaches 90% of the total issued shares under the Reverse Book Building (RBB) mechanism. Suppose the discovered price is acceptable to the acquirer. In that case, the acquirer shall be required to accept all the equity shares so tendered by the public shareholders up to the discovered price. However, if the discovered price is not acceptable to the acquirer, then the acquirer can either make a counter-offer or reject such a price.

Constitution of the Sub-Group

SEBI has received various suggestions and representation over the past years. In SEBI’s attempt to constantly align regulatory requirements with the changing market realities and enhance the efficiency of the delisting mechanism, a need is felt for a comprehensive review of the aforementioned issues. Accordingly, a sub-group was constituted to provide detailed recommendations to make the delisting of companies a rational and convenient exercise, balancing the interest of all stakeholders, including investors/shareholders/promoters/acquirers. After comprehensive deliberations, the sub-group submitted its report to PMAC on 08.08.2023, stating various policy recommendations. Subsequently, the report was also considered before PMAC, wherein PMAC agreed with the recommendations. Further, the PMAC, after deliberation, made the following recommendations:-

• Alternatives to the Reverse Book Building process viz;
• Fixed Pricing Delisting;
• Delisting of Investment Holding Companies.
• Counter-Offer framework;
• Determination of “Floor Price” under Delisting Regulations;
• Review of the reference date for determination of the Floor Price;

Public comments are sought on the recommendations made by the PMAC contained in its report.

Report of the Sub-Group on the SEBI (Delisting of Equity Shares) Regulations, 2021

The report was classified into three chapters mainly:-

1. Introduction
2. Voluntary Delisting – Review of the Reverse Book Building Process
3. Delisting of Investment Holding Companies

Out of this, the 2^nd and 3^rd Chapters are Important.

Voluntary Delisting – Review of the Reverse Book Building Process

In this chapter of the report, the recommendations of the sub-group in connection with the reverse book building under the Delisting Regulations have been set out. The recommendations mainly relate to (a) a review of the counter-offer mechanism, (b) alternatives to the reverse book-building mechanism, (c) the manner of determination of the floor price and (d) a review of the reference date for calculation of the floor price.

Review of the Counter-offer mechanism

The current scenario is that an acquirer intends to make an offer to delist the equity shares of a company from all recognised stock exchanges and is required to provide an exit opportunity to all public shareholders as per Chapter IV of the Delisting Regulations. At present, the opportunity is required to be provided by the acquirer at a price that is discovered through the reverse book-building process.

In a reverse book-building process:-

• The floor price calculated as per the Delisting Regulations is disclosed. The acquirer can also provide an indicative price higher than the floor price.
• The public shareholder is required to tender shares through the stock exchange mechanism. The bidding period remains open for 5 working days.
• In case the post-offer shareholding of the acquirer, along with the shares offered by the public shareholders, reaches 90%, the discovered price shall be determined. This discovered price shall be the price at which shares are accepted through eligible bids that take the shareholding of the acquirer, along with the persons acting in concert, to 90% of the company’s total issued shares. If the acquirer accepts the discovered price, the delisting offer shall be considered successful.
• If the acquirer does not accept such a discovered price, then the acquirer has the option to make a counter-offer. The price at which the counter-offer is made shall be at least the book value of the company (as certified by the manager to the delisting offer).
• Once a counter-offer is made, the public shareholders can tender their shares at the counter-offer price through the stock exchange mechanism. The delisting offer is successful if the post-counter-offer shareholding of the acquirer, along with the shares tendered/offered by the public shareholders at the counter-price, reaches 90% of the company’s total issued shares.

The Sub-Group’s Deliberation was that it needed to review the current threshold for an acquirer to make a counter-offer under the Delisting Regulations. The Delisting Regulation permits the acquirer to make a counter-offer only if, upon the completion of the reverse book-building process, the aggregate post-offer shareholding of the acquirer, along with the shares tendered by the public shareholders, reaches 90% of the total issued shares of the company.

However, where the aggregate post-offer shareholding of the acquirer and the shares tendered by the public shareholders do not reach 90% of the company’s total issued shares, the current provisions do not permit the acquirer to make a counter-offer. This may lead to the scenario where the majority of the public shareholders have tendered their shares and are in favour of delisting, but the delisting offer fails as the required thresholds are not met. In such cases, the acquirer does not have the option to make a counter-offer to the public shareholders. Further, the acquirer will be required to wait for a period of six months to make another delisting offer. Considering the constraint in the current scenario, the sub-group has proposed to lower the threshold required to make an offer that could potentially be accepted based on the bids received by public shareholders. This could help ensure successful delisting offers where the majority of the public shareholders are in favour of the delisting offer.

Further, the absence of any guiding factor in determining the counter-offer price has also been discussed. In this regard, the sub-group proposed a determination of the counter-offer price based on the volume-weighted average of the bids received through the reverse book-building process. This approach reflects the general expectation of the public shareholders that had tendered their shares in the reverse book-building process and helps the acquirer make a meaningful counter-offer that may be accepted.

Eligibility Criteria of Proposed Counter offer Framework

If it is found that the acquirer does not accept the price or if the cumulative post-offering shareholding to acquire fails to reach 90%, then the acquirer shall have the option to make a counter-offer if the bids received are higher of the following:

1. The difference between the acquirer’s shareholding and 75% of the total issued shares of the company and
2. 50% of the public shareholding

Review of “Floor Price” under the Delisting Regulations

The Current position is that the term “floor price” under the Delisting Regulations is the minimum price required to be offered by the acquirer as per Regulation 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011. The sub-group proposed certain relevant provisions based on Regulation 8 of the Takeover Regulations for the determination of the floor price for delisting offers under the Delisting Regulations. Further, the sub-group also proposed an additional parameter for the determination of the floor price to safeguard the interest of the shareholders, i.e., “Adjusted Book Value”. It was reasoned that in case of a delisting offer since the company does not remain listed, it would be appropriate to consider the fair market value of the company’s assets while determining the floor price.

Alternatives to the Reverse Book Building Process

The current position is that the Delisting Regulation, in case of voluntary delisting, provides for a reverse book-building process for discovery of the price at which the existing opportunity is to be provided to all the public shareholders except in case of the delisting of equity shares of small companies and delisting of equity shares of a subsidiary company pursuant to a scheme of arrangement as per Chapter VI of the Delisting Regulations. The sub-group observed that the announcement for delisting of the equity shares of a company usually results in increased volatility and increased speculative activities in the scrip of such a company.

The sub-group proposed providing an acquirer with the option of providing an exit opportunity to all public shareholders at a fixed price under certain scenarios. The sub-group noted that Delisting Regulations provide adequate safeguards to the public shareholders with respect to delisting offers. This is apparent from the fact that a proposal for delisting requires the approval of the shareholder through a special resolution, and the special resolution can be acted upon only if the votes cast by the public shareholder in favour of the proposal are at least two times the votes cast against the proposal. Further, the public shareholders have the right not to offer their shares during the tendering period. It was proposed that such delisting would be permitted only for those companies whose shares are frequently traded as defined under the Takeover Code.

Additionally, such a delisting offer would be subject to the following conditions:-

1. The fixed price offered by the acquirer shall not be lower than the floor price as determined under the Delisting Regulations and
2. The delisting offer shall be successful if the post-offer shareholding of the acquirer, along with the shares tendered by the public shareholders at the price offered by the acquirer, reaches 90% of the company’s total issued shares.

After the six-month cooling-off period presently provided under the Delisting Regulations, any subsequent delisting attempt can be made either through the fixed-price or reverse book-building processes. Other provisions of Chapter IV of the Delisting Regulations relating to the opening of an escrow account, issuance of detailed public announcement, filing of a letter of offer and regulations relating to the payment upon the success of the offer would continue to apply in respect of delisting offers at a fixed price. 

Review of the Reference Date for Determination of the Floor Price

In the current scenario, the Delisting Regulations provide for a minimum acquisition price in the delisting offer, i.e., the “floor price.” The floor price is calculated as of a reference date. Currently, in terms of the Delisting Regulations, the reference date to calculate the floor price is when the stock exchanges must be notified of the board meeting in which the delisting proposal was considered and approved.

The Sub-group deliberated that Regulation 8 (1) of the Delisting Regulations requires the acquirer to make an initial public announcement to all stock exchanges on which the company shares are listed. Subsequently, in terms of Regulation 10 (1) of Delisting Regulations, the company’s board of directors must approve the delisting proposal of the acquirer not later than 21 days from the date of the initial public announcement. Further, Regulation 20(3) of the Delisting Regulations states that the reference date for calculating the floor price is the date the recognised stock exchange(s) must be notified of the board meeting in which the delisting proposal was considered and approved. Additionally, for a delisting offer as per Regulation 37 of the Delisting Regulations, the board of directors are required to provide a prior intimation to the stock exchange of the board meeting in which the delisting proposal will be considered following Regulation 29 of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015 as amended (“SEBI Listing Regulations”).

As the sub-group could not risk substantial and abnormal trading activity in the shares of the company during the period between the date of the initial public announcement or the date of prior intimation to the stock exchanges of the board meeting in which the delisting proposal will be considered, as applicable and the date on which the stock exchanges are required to be notified of the board meeting in which the delisting proposal was considered and approved. Accordingly, the sub-group acknowledged that the floor price should be calculated based on an “undisturbed price”. An undisturbed price is the price as of the reference date when the information relating to the proposed delisting offer is first disclosed to the public.

Finally, the sub-group proposed that the reference date be the date of the initial public announcement or the date on which the prior intimation is required to be given to the stock exchanges, as applicable. Further, it is classified that if the initial public announcement is made during market hours, then the date of such initial public announcement is made during market hours. The date of such an initial public announcement will be the reference date, and if the initial public announcement is made after market hours, then the next day will be the reference date.

Delisting Of Investment Holding Companies

Under this chapter, the sub-group’s recommendations relate to delisting investment holding companies. The sub-group has made the twofold recommendation they relate to (a) framework for delisting investment holding companies and (b) checks and balances in connection with the proposed framework.

Delisting Framework for Investment Holding Companies

An investment holding company (IHC) is a company whose main activity is holding investments in listed and unlisted companies. In some cases, the IHCs may hold other assets. The shares of an IHC tend to trade at a discount compared to the underlying value of the investments of the IHC. One of the primary reasons is an investment if the promoters and members of the promoter group in IHC are long-term investments, and the market does not expect the sale of such shares.

In the current scenario, the delisting regulations do not provide a separate framework for delisting listed IHCs. Such companies must be delisted as per the Delisting Regulations. However, the market price and the price determined as the floor price will not reflect the intrinsic value of the investments, and the reverse book-building mechanism may not provide a fair existing price to the public shareholders, as the valuation of such companies is a complex issue given the nature of investments and assets. Accordingly, the sub-group deliberated the need for a separate delisting mechanism for such listed IHCs.

In this regard, the sub-group proposed an alternate delisting framework, whereby the shares of the underlying listed companies held by the IHC are transferred to the IHC’s public shareholders, and the holding of the public shareholders in the IHC is extinguished pursuant to a court-approved scheme of arrangement.

The sub-group proposed the following mechanism:-

• Transfer of underlying shares held by a listed IHC in other listed companies to the public shareholders of such IHC in proportion to the shareholding of the public shareholders in the IHC;
• Cash payments to the public shareholders of the listed IHC in exchange for the underlying shares or investments made by IHC in unlisted companies and other assets; and
• Extinguishment of public shareholding of the listed IHC upon transfer of the underlying shares mentioned at (a) and cash payments mentioned at (b), according to a scheme for selective reduction of capital under Section 66 of the Companies Act, 2013, as amended.

Checks and Balances

The current position is that Chapter III of the Delisting Regulations prescribes certain checks and balances in connection with the delisting of listed companies. These include approval of the board of directors, special resolution of the shareholders and in-principle approval of the stock exchanges. Regulation 37 of the Delisting Regulation provides additional safeguards concerning the delisting of a subsidiary company of a listed holding company according to a scheme of arrangement.

The sub-group discussed the need to include additional checks and balances in connection with the proposed framework, including ensuring that only certain listed IHCs were eligible under the proposed delisting framework.

The sub-group proposed the following checks and balances in relation to the proposed delisting framework to protect public shareholders’ interests.

• The above mechanism will only be available to listed companies having at least 75% of their overall fair value comprising direct investments in other listed companies;
• The listed IHC will be required to obtain the approval of its audit committee and board of directors prior to filing the scheme with the stock exchanges;
• The special resolution can be acted upon only if the votes cast by the public shareholders of the listed IHC in favour of the delisting resolution are at least two times the votes case against it;
• Material disclosure concerning the calculation of the entitlement ratio and per share consideration will be required to be included in the explanatory statement of the notice for the shareholder’s meeting;
• The valuation reports obtained in connection with the scheme will be required to be made public, and
• Report to be obtained from a chartered account or merchant banker confirming the entitlement ratio.

The sub-group proposed the inclusion of additional safeguards based on regulation 37 of the Delisting Regulation. The additional safeguards are as follows: i) continuous listing of shares of the IHC for a period of at least 3 years, ii) absence of adverse orders of the SEBI against such IHC and their promoters or promoter group in the last three years, and iii0 prohibition on relisting of shares of the IHC for a period of 3 years from the date of delisting. Existing checks and balances, including creditor approval for the scheme, were also discussed.

The sub-group also deliberated the manner of transfer of fractional shares to the public shareholders of the listed IHC after the scheme. Fractional shares will be dealt with as per the Master Circular on Scheme of Arrangement dated 20 June 2023, as amended from time to time. The sub-group agreed to adopt a similar mechanism for the transfer of fractional shares to the public shareholders of listed IHCs.

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