By Sandeep Parekh
Going public and getting listed on an exchange is, for the most part, considered a milestone for a company. However, due to factors beyond its control, such as sparse trading volumes or a minimum public float, a listed company may find itself at a crossroads, deciding whether to remain listed when the benefits no longer justify the costs associated with being publicly traded.
A company may also delist for strategic reasons, to do things that are not possible with millions of shareholders to take care of. A reasonable next step is to pursue delisting, essential in “take-private” transactions. Since delisting is a crucial element in the mosaic of processes that shape capital markets, it’s only logical that the mechanism for a company to exit the public markets should be efficient.
However, instances of delisting in India are uncommon, so much so that the process is largely considered a hit and miss. Often what holds up delisting is a small group of people who try to negotiate several times higher than the fair price. The resulting failure causes loss, both to the company and the vast majority of shareholders.
On this precise issue, the Securities and Exchange Board of India (Sebi), in August 2023, proposed a review of the voluntary delisting norms under the Sebi (Delisting of Equity Shares) Regulations, 2021, to refine the process and tackle hurdles faced by listed firms while exiting public markets. This included the introduction of a fixed price mechanism.
Sebi, in its recent board meeting on June 27, has approved the proposals, marking a pivotal moment in the evolution of the delisting framework. Some noteworthy proposals related to eligibility thresholds for the counter-offer mechanism, use of the adjusted book value in determining the floor price, and the setting of a reference date.
The delisting framework provided for the reverse book building process as the (nearly) sole price determination mechanism for voluntary delisting. In what has been hailed as a much-awaited move, Sebi has approved the fixed price mechanism as an alternative to the reverse book building mechanism. The fixed price offered by an acquirer must include at least a 15% premium over the floor price and can only be availed for delisting of companies whose shares are frequently traded.
The fixed price mechanism was proposed to allay concerns about the inherent price uncertainty linked with the reverse book building mechanism and the resultant increase in volatility and speculative activities in the company’s scrip. The proposal was premised on empowering shareholders to decide upfront whether to tender their shares at the given price and provide a transparent pricing strategy that is easily understood by all stakeholders.
The stringent conditions for making a counter-offer under the current framework have often led to failed delisting attempts, even when a majority of shareholders are in favour. Acquirers are only eligible to make a counter-offer if their post-offer shareholding amounts to 90% of the company’s issued shares.
It was noted that the high threshold deprived acquirers of the opportunity to make a counter-offer, even if a few shareholders who collectively hold major shareholding chose against bidding while a majority favoured the proposal. Sebi proposed to lower the threshold for making a counter-offer to allow more flexibility to acquirers and increase the likelihood of successful delisting offers.
The counter-offer price was proposed to be computed based on the volume-weighted average price of the shares tendered in the reverse book-building process or the initial floor price, whichever is higher. This was aimed at ensuring the counter-offer reflects the general expectations of shareholders.
Sebi approved the proposal to lower the threshold to 75% in the case of delisting through the reverse book-building process, provided at least 50% of public shareholding is tendered. The lower threshold is designed to provide more flexibility in negotiating a price acceptable to both the acquirer and the public shareholders. However, pursuant to a counter-offer, the 90% threshold would still have to be met for the delisting to succeed.
Similarly, determining the floor price has been a contentious issue, often leading to disputes over valuation. Sebi had proposed the adjusted book value as an additional parameter for determining the floor price. This metric considers the fair market value of the company’s assets, ensuring that the floor price accurately reflects the intrinsic value of the shares. Sebi has approved this added parameter for both frequently and infrequently traded shares, with the exception of public sector undertakings.
The floor price is calculated based on a reference date, on which the exchanges are required to be notified of the board meeting in which the delisting proposal was approved. Sebi emphasised the importance of a clearly defined reference date for calculating the floor price to ensure consistency and fairness in valuation.
Sebi’s proposal was based on its observation 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 carried the risk of abnormal trading activity which may disturb the calculation of the floor price.
To tackle this, Sebi proposed to calculate 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, Sebi has approved the modification of the reference date from the date of board approval to that of the initial public announcement for voluntary delisting.
By incorporating a fixed price mechanism and lowering the counter-offer threshold, Sebi has addressed key issues that have historically hindered successful delisting. These modifications aim to reduce speculative trading, thus preserving the integrity of delisting and minimising adverse influences. The updated methodologies for calculating the floor price and counter-offer price are notable.
The adjusted book value ensures the floor price is based on the actual value of a company’s assets, and shareholders receive a fair and reasonable exit. While amendments or circulars are yet to be notified, Sebi’s decision to streamline the process is expected to address the fault lines exposed by delisting attempts, without influencing the outcome that ultimately depends on the shareholders and the company.
By aligning the delisting process with market realities and investor expectations, Sebi’s reforms are poised to enhance market efficiency and foster a more robust investment environment. One is more likely to go to a movie theatre where the exit door is not too small to leave. A similarly easy exit is counterintuitively likely to make initial public offerings more common.
Sandeep Parekh is managing partner at Finsec Law Advisors. Coauthored by Rashmi Birmole and Manas Dhagat, respectively, senior associate and associate, Finsec Law Advisors. Views are personal.