By Sandeep Parekh

The concept of “delisting” securities, as the word suggests, allows publicly traded companies to remove their securities from being listed on stock exchanges, either voluntarily or by regulatory mandate. It signifies a company’s transition from being publicly traded to becoming privately held, by providing an exit route to its existing shareholders.

While the Securities and Exchange Board of India (SEBI) had put in place an elaborate delisting process with the SEBI (Delisting of Equity Shares) Regulations, 2021 (Delisting Regulations), instances of delisting have been rather uncommon given the cumbersome process in the reverse book building (RBB) mechanism. The old delisting norms have often left companies trapped with speculative bidding and artificial inflation of the exit price.

To address these inefficiencies, SEBI, on September 25 introduced the SEBI (Delisting of Equity Shares) (Amendment) Regulations, 2024 (Delisting Amendment). The changes are aimed at reducing friction in the delisting process, offering acquirers more flexibility and ensuring fair outcomes for shareholders.

Prior to the Delisting Amendment, the exit price for voluntary delisting was determined exclusively through RBB. The price was set based on bids submitted by shareholders, benchmarked against a floor price or an indicative price. The indicative price is the upfront price declared by the acquirer, which must be higher than the floor price. Since the announcement of a voluntary delisting is usually followed by increased volatility and activity in the trading of the company’s scrip (given that the exit price was earlier determined by the RBB process), a group of bidders acting together could shoot up the exit price, causing the delisting efforts to collapse. While in theory RBB appears to be fair and transparent, it is controlled by a handful of speculators who cartelise and ensure the failure of delisting, hurting the genuine investor who could have gained an attractive premium.

SEBI has now attempted to remedy this through the Delisting Amendment by providing listed firms with an alternative to delisting through a fixed price mechanism (FPM). Under the FPM, acquirers can set a fixed delisting price at least 15% above the floor price and must accept the equity shares tendered by the public shareholders if the acquirer’s post-offer shareholding along with the tendered shares reaches 90% of the issued share capital of that class. Unlike the RBB method, this mechanism is likely to offer greater transparency and price certainty by eliminating speculative bidding and inflated exit prices. It will also reduce volatility and allow the acquirer to arrange funds for the offer in advance, thereby streamlining the delisting process.

The stringent conditions under the older delisting norms meant that acquirers could only make a counter-offer if they reached a post-offer shareholding of 90% — a threshold that frequently led to failed delisting attempts. With the Delisting Amendment, SEBI has reduced the requirement to 75%, provided at least 50% of the public shareholding is tendered. SEBI has also revised the norms for the counter offer price, which could not be lower than the book value of the company under the earlier framework. Now, the counter price cannot be less than the higher of either (a) the volume weighted average price of the shares tendered/offered in the RBB process; or (b) indicative price, if any. These revised norms are likely to better safeguard public interest while increasing the chances of successful delisting by allowing the acquirers to negotiate more effectively with shareholders.

Another significant change has been the method of determining the floor price which is no longer required to be computed in the context of an open offer as opposed to during voluntary delisting. SEBI now requires companies to use the adjusted book value of assets as a key parameter in setting the floor price, ensuring shareholders receive compensation aligned with the company’s intrinsic value. The floor price will be calculated based on a reference date, which shall now be that of the initial public announcement and not the date on which the exchanges are notified of the board meeting where the delisting proposal was considered. This change mitigates the risk of abnormal trading activity and will align the floor price more accurately with market conditions.

The new norms also introduce a concrete framework for delisting of an investment holding company (IHC). An IHC is a firm holding investments in listed or unlisted companies or holding assets other than such investments. Since there was no separate framework for delisting IHCs, this led to the equity shares of a listed IHC being traded at a discount compared to the true value of its investments in listed and unlisted firms. Consequently, the floor price set under the Delisting Regulations often did not reflect the true intrinsic value of these investments.

With the Delisting Amendment, IHCs now have an alternate delisting route, allowing them to transfer shares of underlying listed firms to public shareholders proportionally after cash payments for unlisted investments and other assets. This will be followed by a scheme of selective capital reduction to extinguish the public shareholding in IHCs in terms of provisions of the Companies Act, 2013. However, only IHCs with at least 75% of their fair value in direct investments in listed firms can opt for this alternative.

SEBI’s newly implemented delisting reforms mark a transformative step towards resolving the long-standing challenges in India’s capital markets. The changes are likely to encourage smoother transactions and enhance the efficiency of market exits without compromising investor interests. The improved predictability of the delisting process will inspire confidence among both promoters and investors, balancing ease of exit with protection for minority shareholders. Counterintuitively, easier delisting can also foster more IPOs by reassuring firms that exiting the market, when necessary, will not be overly cumbersome or costly. With these reforms, SEBI has aligned India’s delisting norms with global standards, paving the way for more robust, efficient, and balanced market conditions.

Coauthored with Navneeta Shankar and Pragya Garg, associates, Finsec Law Advisors.

The author is managing partner, Finsec Law Advisors.

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