Amendments To Voluntary Delisting In India: An Analysis

Rationale for voluntary delisting

A controlling shareholder may choose to intentionally delist the company's equity shares from Indian stock exchanges by using a process known as voluntary delisting. It essentially means the company which is listed on the Indian stock exchanges is voluntarily removed from the lists of the stock exchanges. In India, delisting may also occur involuntarily, in which case the regulators delist the equity shares for failing to follow listing requirements. Controlling investors use it as a crucial financial structuring technique globally to increase the value of their investment.

Below is a more thorough discussion of the Proposed Amendments.

(1) Review of the Reverse Book-Building Process (RBB)

The RBB, entails the tendering of shares and the submission of bids by public shareholders during the offer period. Following the offer closure, the bids are utilized to ascertain the price at which the acquirer's total shareholding, accounting for the shares tendered by shareholders (Post Offer Shareholding), equals 90% or more of the total shares issued; should the acquirer's Post Offer Shareholding fall short of 90%, the delisting offer is considered unsuccessful. Should the latter condition be satisfied, the price calculated—referred to as the discovered price—is the price at which shares are accepted through qualifying bids. Upon acceptance of the discovered price by the acquirer, the delisting offer is considered successful.

The acquirer may make a counter-offer if the discovered price is not acceptable to them, so long as the price they offer is at least the company's book value. If the acquirer's post-offer shareholding hits the 90% mark, the counter-offer is deemed successful.

Pursuant to the Proposed Amendments, the SEBI Board has authorized the implementation of a fixed pricing procedure in lieu of the RBB method for delisting companies whose shares are frequently traded. An acquirer's fixed price must be at least 15% higher than the floor price. Consequently, the exit price can be ascertained by an acquirer using the reverse book-building approach or the fixed price method.

The lowest amount that the acquirer is required to pay the general shareholders for the shares that are tendered is referred to as the floor price. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Regulations), specifically Regulation 8, must be followed when calculating the floor price under the Delisting Regulations. As per the Proposed Amendments, the floor price will be determined by taking into account the adjusted book value of the listed company, as confirmed by an independent registered valuer.

(a) Counter-Offer Framework

Acquirers may only make counteroffers in accordance with the Delisting Regulations if their Post-Offer Shareholding represents a minimum of 90% of the company's total issued shares. This criteria offers leeway for a delisting offer to fail even in situations where the majority of public shareholders may, in fact, support the delisting plan. It also gives majority shareholders the ability to influence the process. This kind of failure also prevents acquirers from having the chance to submit a counteroffer. Moreover, the Delisting Regulations lack guidance in the process of determining the counteroffer price, aside from the company's book value serving as the minimum criterion.

Under the Proposed Amendments, if the post-offer shareholding through the reverse book-building price discovery process exceeds 75% (assuming at least 50% of the public shareholders have tendered), the acquirer may make an early counter-offer. Delisting, however, wouldn't be effective until the acquirer's total post-offer shares reached 90%. The counter-offer price cannot be less than the higher of: (a) the volume weighted average price of the shares tendered/offered; and (b) indicative price, if any, offered by the acquirer.

(b) Determination of Reference Date

The floor price is determined by the Delisting Regulations using a reference date, which is the date the exchanges must be informed of the board meeting where the delisting request was approved. There is a risk of abnormal trading activity that could interfere with the floor price calculation during the period between the date on which exchanges are notified and the public announcement of the acquirer's delisting proposal or prior notification to exchanges in the case of promoter-led delisting.

In order to address this problem, the SEBI Board has adopted using of an "undisturbed price," or determining the floor price as of the day when details about the proposed delisting are first made public. As a result, the date of the first public announcement or the day on which the exchanges are notified in advance is adopted as the reference date.

(2) Introduction of a Fixed Price Mechanism

At present, the only method available to determine the price for voluntary delisting under the Delisting Regulations is the RBB procedure. The SEBI Board via the Proposed Amendments has replaced the RBB with a fixed price mechanism which has been widely welcomed as a long-awaited development. The aforementioned plan aims to soothe worries about the price uncertainty that comes with the RBB process, as well as the subsequent rise in volatility and speculative activity in the company's shares. The intention is to give shareholders more control over whether to tender their shares at the stated price and to make the amount of money needed more visible so that the acquirer can plan ahead.

Only those companies whose shares are frequently traded in compliance with the Takeover Regulations will be eligible for the proposed fixed pricing method. Pricing-wise, the delisting offer will be deemed successful if the Post-Offer Shareholding reaches the 90% criterion, and the fixed price provided will not be less than the floor price determined by the Delisting Regulations. Furthermore, during the designated cooling-off period, acquirers or promoters who have previously chosen to delist but were unsuccessful may make a delisting bid via the fixed price mechanism.

(3) An Opinion

One of the many characteristics of a well-functioning securities market is the smooth delisting of listed companies from the open market. The current delisting procedure in the Indian securities market is far from effective, given the history of unsuccessful delisting offers.

In light of this, the Proposed Amendments represent a praiseworthy first step toward expediting the delisting procedure. A common thread across the suggestions is the emphasis on establishing an ecosystem that increases the likelihood that a delisting offer will be accepted in its entirety. In order to do this, friction must be reduced, the process must be redesigned to meet shareholder expectations, and external influences such as the influence of majority shareholders, speculative trading activity, and market volatility must be minimized. It appears that the modifications made to price computation techniques are also intended to ensure that public stockholders have a fair exit.

In conclusion, it is difficult to find much fault with the Proposed Amendments meant to do away with the subjectivity and ambiguity surrounding the delisting procedure. In addition, market players have long demanded and justified the use of a fixed price structure. Although this can be viewed as a positive move in general, it is unclear what the practicalities and difficulties of such a process will be.

Views are personal.