The eternal question of “freedom versus regulation” is the one that has bothered lawmakers around the world—probably since the time laws started getting made. The most interesting debates on financial markets regulation arose in the US in the 1980s. Some of these went so far as to question the very need for a securities market regulator. It, obviously, cannot be my intention to raise the same question for Sebi. This is a body that has functioned independently and has performed admirably. Global (and Indian) experience has shown the need for a strong capital markets regulator.
So, why do I feel compelled to raise this fundamental debate? I am raising it because every regulator must, every day, evaluate every policy pronouncement it issues, in the context of this question. I raise it because now is the time when a responsive government that understands business realities could position itself as taking a more liberal stand in the “freedom versus regulation” graph. And I raise it in the context of the fact that I believe Sebi continued on its extremely conservative path, while deciding on the recent changes that have been made in the de-listing guidelines.
But let’s just quickly summarise the key takeaways from Sebi’s amendments (yet to be notified) on de-listing. First, the reverse book building process has been entirely retained. Second, apart from the 90% threshold, an additional test in the form of number of shareholders has been inserted—now, 25% in number of public demat shareholders must tender their shares for any de-listing to be successful. Third, tax arbitrage against de-listing has been removed, by allowing the stock exchange platform for de-listing offers. Fourth, there is a bar on bringing a de-listing offer where the promoter group has sold any shares within 180 days prior to the offer. Fifth, timelines for a de-listing offer have been reduced to 11 working weeks. Sixth, a window for direct de-listing through a takeover offer has been made available. And last, pricing is now based on the 90% threshold rather than the “maximum bids” price.
Let us now analyse these amendments in the context of some facts. If one were to look at the history of the Indian capital markets, it would be easy to see that takeovers and de-listings have not only generated buzz, but have always generated significant value for the minority—whether in the fixed price takeover code regime or under the reverse book building route. Where the companies are high quality, the prices at which the public has got an opportunity to exit have also been correspondingly high. It would also be evident that the book building route has, in quite a few situations, resulted in failed de-listing attempts. The price provided by the “public” has always been at huge premium, viewed as unreasonable by promoters or MNC parent companies. Therefore, offers have fallen through, or have been undertaken at substantial premiums.
Today, we are not in an environment where Sebi has to worry the same degree as a decade ago about “quality” stocks going away from the market. India is more confident and our regulators need to exude that confidence. There is a definite case for experimenting with some “interesting” relaxations to the reverse book building route. I would say that we should consider opening a limited period testing window (say, 18 months) within which promoters and MNC parent companies are allowed to bring in de-listing offers under a refined version of the old fixed price takeover regime. The non-reverse book building is one, as in case of most other countries, where a fixed price is indicated by the acquirer, which is then approved by the minority. Many refinements and safeguards to that regime can be thought of. As our boards and independent directors become truly independent and more responsible, we could build in responsibility statements from them. We could provide safeguards to ensure that the “fixed price” is validated by two merchant bankers of repute (size, experience, other safeguards could be built into their selection). And that it should have a floor at a certain defined premium to current market price.
We could have a shareholders meeting to approve the de-listing offer, with only non-interested shareholders being permitted to vote in such meetings. We could call for a disclosure of all transactions over the last one year that individually exceed more than 1% of the company’s share capital as part of the de-listing offer document. We could similarly provide a mechanism to evaluate the impact of promoter/acquirer transactions in the stock over a defined time period prior to the offer. Last, and only if it is felt that the above refinements are still not enough, one could think of an independent expert panel (to be constituted by Sebi) to ensure fairness of all de-listing offers above a certain monetary threshold. And companies that did not check all the boxes on these safeguards could then be permitted to opt for the stronger reverse book building route.
One additional point is that even within the existing regime, the new threshold for 25% mandatory participation (reckoned in number) is an extremely onerous one. For one, a number of public company shareholders split their actual shareholding into many folios. Second, if we actually look at data of retail participation in reverse book built offers, we would quite easily conclude that most such delistings would have not gone through, had this condition been on the statute earlier. Therefore, while the objective of this condition is laudable, the actual implementation of it would open up further challenges for companies. And would more or less make de-listing a highly improbable outcome.
In summary, it is my view that as opposed to the current regime, companies should be allowed a fair and balanced regime to take “go private” decisions on commercial considerations. In the long term, that would encourage a larger number of listings, as well as creation of value for the same minority that is ostensibly sought to be protected through these guidelines. The flow of capital into our country, in the economy and into the markets would significantly deepen. We have the opportunity now. Sebi has taken the Indian capital markets to 195 for no loss at the end of day 1. The pitch is playing much better. We have the opportunity to show some sensibly aggressive batting now.
By Vivek Gupta
The author is partner, BMR Advisors
