Amendments To Delisting Regulations: Delisting Process Simplified
Authored By - Abhishek Dadoo (Partner), Anvita Mishra (Principal Associate) and Gaurang Mansinghka (Associate), Khaitan & Co.
Introduction:
Delisting offers by promoters are often subject to increased volatility, speculative activities in the scrip of the listed target which results in an uptick in the market price of the scrip and price uncertainty for the acquiring promoters. The increase in price often ramps up the deal size for the acquiring promoters, making it commercially unviable. Under the existing regime, the public shareholders are free to tender their shares at any price above the floor price irrespective of the stock price. To facilitate fair price discovery for delisting offers and to ease the delisting process, the Securities and Exchange Board of India (SEBI) has recently approved a few amendments to the SEBI (Delisting of Equity Shares) Regulations, 2021 (Delisting Regulations). The amended regulations are currently awaited, however, the key aspects of the approved amendments are discussed below.
Fixed price delisting:
A fixed price delisting will be an alternative to the existing reverse book building process (RBB) for delisting of companies whose shares are frequently traded. It is interesting to note that the agenda for SEBI’s board meeting (Agenda) initially proposed a premium of 20 per cent, however a premium of 15 per cent over the floor price was ultimately approved as the minimum fixed price for a delisting offer. In case of a fixed price delisting, the public shareholders are left with a binary ‘yes’ or ‘no’ option thereby completely negating the RBB risk wherein the public shareholders are free to tender their shares at any price equal to or more than the floor price. Having a fixed price steers the delisting offer clear off any price uncertainty and enables the acquirer in arranging funds upfront. However, in case of a fixed price delisting, the acquirer will not be able to make a counter-offer (with an enhanced offer price) and will have to wait for a period of 6 months for a subsequent delisting attempt.
Counter offer mechanics:
The counter-offer threshold for RBB has been brought down from 90 per cent to 75 per cent provided that 50 per cent of the public shareholding has been tendered during RBB. The threshold has been lowered because there could be a scenario where majority of the public shareholders tender their shares in favour of the delisting offer, but the delisting fails because the 90% threshold has not been met. This also provides a fair opportunity to the acquirer to re-think an exit price to take the company private. Further, to ensure fair pricing, the counter-offer price has been linked to the higher of the volume weighted average price (VWAP) of the shares tendered under the RBB and the indicative price, if any offered by the acquirer. This introduces a level of flexibility, ensuring prices are more aligned with market sentiments and movements.
Reference date:
Under the current regime, there existed a confusion whether the date of initial public announcement or the date of board meeting is to be considered as the reference date. Reference date is the date basis which the floor price of the delisting offer is calculated. In case the reference date was a date other than the date of the board meeting, companies were required to undertake that there is no difference in floor price calculation from the original reference date to the board meeting date. Soon after the initial public announcement, owing to speculative activities in the scrip of the listed target, the market price of the scrip would increase resulting in an increase in the floor price.
To resolve the aforesaid confusion and to mitigate the risk of price movement post the announcement of a delisting offer, SEBI has approved an amendment to use the date of initial public announcement as the reference date. This benefits the acquirer as the unaffected price is considered for arriving at the floor price. Pegging the floor price to a date when the price is not impacted by opportunistic trades promotes transparency and reduces the risk of price manipulation.
Additional parameter for calculating floor price:
In addition to the current pricing parameters, SEBI has proposed to add an additional parameter namely, the adjusted book value mechanism for determining the floor price of both frequently and infrequently traded shares. The Agenda inter alia mentions that the valuation under the proposed method will be a factor of the book value of the target company’s assets and liabilities. SEBI has considered adding this additional parameter as the metrics under the current parameters are in the context of an open offer where the companies would continue to remain listed. Considering that the adjusted book value of assets and liabilities may not be readily available, the acquirer may need to approach the target company and undertake a valuation exercise for the purpose of the delisting offer.
Delisting of investment holding companies:
The existing regulations do not have a separate mechanism to delist an investment holding company (IHC). An alternate delisting framework for IHCs through scheme of arrangement by way of selective capital reduction has been approved by SEBI. An IHC is proposed to be defined as a company that has at least 75% of its fair value (net of liabilities) comprising direct investments in equity shares of other listed companies. As part of this process, the IHC will be required to proportionately transfer the underlying equity shares in other listed companies to its public shareholders and also make cash payments to them against the assets including investments in land, building, unlisted companies etc. An IHC will be permitted to delist only after the entire public shareholding is extinguished.
Given that IHCs often trade at a significant discount to the underlying value of their assets, the valuation of an IHC has always been a bone of contention. Therefore, delisting an IHC under the existing regime is considered as an uphill battle. By virtue of the proposed amendments, SEBI has strived to clear the air surrounding an IHC’s delisting and simplify the process for delisting of an IHC.
Conclusion:
By approving the aforesaid amendments to simplify the delisting process, SEBI has continued its efforts towards ease of doing business. These amendments aim to mitigate the impact of speculative trades and price uncertainty, thereby limiting the exorbitant premium which the acquirer would otherwise be required to pay for a successful delisting. These amendments will go a long way in ironing out issues in the existing regime and making the delisting process more seamless and efficient. The proposed amendments are indeed a welcome move, but the notified amendments will need to provide clarity on aspects namely, calculation of adjusted book value, process of delisting IHC etc. The proposed amendments are expected to result in more successful delisting offers, however, as these amendments are not yet notified, it is crucial to remember that the devil lies in the details.
