The Securities and Exchange Board of India has recently introduced noteworthy changes to the delisting framework under the SEBI (Delisting of Equity Shares) Regulations, 2021. These changes are made with the aim to align the regulatory regime with international best practices, strengthen investor protection and ensure transparency in the delisting process. This blog examines the amendments introduced by SEBI, analyses the impact on stakeholders and critically examines its effectiveness in achieving its objectives.
Understanding delisting[1]
Delisting signifies the evacuation of the posting securities of a recorded company from the Stock Trades. In other words, it implies striking off the title of a company from the stock trade so that no exchange can be put in the securities of that delisted company. Delisting of securities is of two sorts specifically intentional delisting and obligatory delisting. In a deliberate delisting, a recorded company looks for its possess infringement for the delisting of its securities whereas the last mentioned happens when the Stock Trades itself delists the securities of such company. It is a matter of will wherein an acquirer which is more often than not a company’s promoter chooses to delist the company’s value offers from a recognized stock trade on which they are recorded
Reverse Book Building Process[2]
Corporates looking to delist their offers through a buyback method can utilize the Reverse Book Building prepare, which is planned to collect offer shareholder orders online by reaching the fitting BRLMs. In the occasion of inverted book building, the acquirer/company offers to purchase back offers from the proprietors. Reverse Book Building is basically a way to discover costs that work. The instrument accumulates offers from shareholders at different costs that are more than or break even with to the floor cost whereas the Reverse Book Building is open. The buyback cost is decided after the closing date of the offer.
Key highlights of 2024 amendments by SEBI
In response to recommendations made by a subgroup of its Primary Market Advisory Committee in its consultation paper[3], which was published on August 14, 2023, SEBI also recently announced changes to the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021[4] (“Delisting Regulations“).
The Securities and Exchange Board of India (Delisting of Equity Shares) (Amendment) Regulations, 2024[5] (the “Amendment Regulations“) brought about the following important modifications.
1. Allowing listed companies to delist at a certain price if their shares are regularly traded. Prior to the modifications, the Delisting Regulations only allowed delisting using the Reverse Book Building (RBB) procedure.
2. In the event of an RBB delisting, the acquirer may make a counteroffer, provided that it includes a minimum public tender and a higher revised offer price.
3. The possibility of delisting Investment Holding Companies (IHC) through a plan approved by the NCLT is one of its advantages.
Applicability of the Amendment
If the Initial Public Announcement is made on or after September 25, 2024, the fixed price delisting path will be available. Under the previous delisting rules, acquirers may submit delisting proposals for up to 60 days after September 25, 2024 (i.e., until November 24, 2024).
Critical analysis
Fixed Price Delisting (Regulation 20A)
It has been mandated by SEBI that the offer price for fixed delisting must include a premium of 15% over the floor price calculated in terms of Regulation 19 A. Fixed price delisting is only available if the shares of the company are traded frequently enough. The reason for this 15% premium aligns with SEBI’s analysis that under the RBB route the companies that delisted from Jan 01, 2009, till May 31, 2024, offered average and median premiums of about 40% and 17% over the floor price.
Determination of Floor Price
The floor price for both, fixed price and RBB routes, should be the highest of:
- The volume-weighted normal cost paid or payable for acquisitions made by the acquirer and people acting in concert amid 52 weeks earlier to the reference date; the most elevated cost paid or payable for any securing made by the acquirer and people acting in concert amid the 26 weeks earlier to the reference date;
- The volume-weighted normal advertise cost for 60 exchanging days earlier to the reference date on the stock trade where the most extreme exchanging volume of the value offers is recorded;
- Adjusted book esteem decided by an autonomous enrolled valuer, taking into account solidified financials;
- The sum is decided by an impartial enrolled valuer, taking into thought valuation pointers for offers of businesses in the same industry where the offers are exchanged not exceptionally commonly.
Before the Delisting Amendment Regulations were introduced, the floor price under a delisting offer was determined similarly to how the open price for shares of the listed business would have been determined under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.[6]
Revamped Counter-Offer Mechanism
The Amendment Regulations have revamped the thresholds for an acquirer to make counter offers. An acquirer may make a counteroffer to the public shareholder contingent that the post-offer shareholding of the acquirer shall not be less than 75% (which was 90% prior to the introduction of the latest Regulations) and at least 50% of public shareholders have tendered their shares in the delisting offer. Following the change, the counteroffer prices need to surpass both the indicative pricing (if any) and the volume-weighted average price of shares offered throughout the RBB process.
In the case of the fixed price delisting a counter-offer mechanism does not apply as it does not contemplate any bidding or price discovery mechanism.
Delisting of Investment Holding Companies[7] (IHC)
Investment Holding Companies are entities that hold assets and securities of other listed companies and serve as ownership vehicles of other companies or investments. A holding entity is a corporation that mostly has a controlling stake in other businesses, giving it considerable influence over its policy choices. Although the degree of influence over operational management might vary greatly, this distinguishing feature of holding corporations makes them stand out.
If a corporation meets the requirements to be classified as an IHC, the delisting may be tried in this way in addition to the RBB and fixed-priced delisting methods. In this event, there shall be the involvement of the National Company Law Tribunal. If it meets the conditions outlined in the Amendment, an IHC may delist immediately through a plan of arrangement approved by the NCLT, or it may do so if at least 75% of its fair value is made up of direct investments in equity shares of other listed companies. The parameters outlined in the Amendments’ Explanation to Regulation 38(3)(i) shall be used to determine the fair value. This plan is sort of a squeeze-out mechanism which includes;
- allocating listed securities to public shareholders on a pro-rata basis
- giving funds to the shareholders who have invested in unlisted businesses and other assets
- reducing the ownership stake of the public in the IHC.
The shareholders’ voting requirement is the same as a delisting accomplished outside of the planned method, even if this may function as a squeeze-out; two-thirds of the public shareholders must vote in favour of the scheme. The listed IHC has to apply to the stock exchange for its delisting.
Effects of the amendment
- Improved Flexibility and Efficiency[8]
The implementation of a fixed price mechanism is anticipated to lessen the complexity of the RBB process, which has been criticized for its potential to cause pricing volatility and drawn-out negotiations. By permitting a clear, fixed offer, SEBI hopes to streamline the delisting process and make it more appealing to businesses thinking about taking this route.
- Potential Increase in Delisting Activity
Previously, delisting initiatives in India have been difficult, with many companies unable to finish the process because of the strict requirements. With these alterations, there is a chance for a rise in successful delistings, as they offer promoters improved conditions
- Keeping Shareholder Interests in Balance
These modifications simplify exit plans for acquirers, but they also provide safeguards for minority owners. In order to guarantee that public shareholders get just remuneration during the delisting process, a premium above the floor price is required.
- Promotion of Market Activity[9]:
SEBI’s changes may ironically promote more initial public offerings (IPOs) by streamlining the delisting procedure. Businesses may be more inclined to enter public markets if they are certain that leaving won’t be too difficult or expensive. A more active capital market ecology may result from this.
- Conformity to International Standards[10]
By bringing India’s delisting requirements into line with international norms, the reforms foster a more resilient and effective market environment. It is anticipated that this upgrading would draw in international money and boost investor trust in Indian capital markets generally.
Conclusion
This Amendment will now allow acquirers to have greater options and flexibility with regard to making voluntary delisting. The RBB process will be less volatile and prone to speculative activity if a fixed price option is included and the reference date for establishing the floor price is revised. Additionally, the RBB process’s lowered bar for counteroffers will help to mitigate some of the problems caused by previous unsuccessful delisting attempts. The modifications will, in general, increase the predictability of the delisting process and enable acquirers to provide public shareholders with a viable exit option.
[1] The Institute of Company Secretaries of India, Delisting of Equity Shares: Law & Practice (2019), available at https://www.icsi.edu/media/webmodules/publications/Delisting_of_Equity_Shares_Law_Practice.pdf.
[2] National Stock Exchange of India, Initial Public Offerings: Reverse Book Building, available at https://www.nseindia.com/products-services/initial-public-offerings-reverse-book-building.
[3] Securities and Exchange Board of India, Consultation Paper on Review of Voluntary Delisting Norms Under SEBI (Delisting of Equity Shares) Regulations, 2021 (Aug. 2023), available at https://www.sebi.gov.in/reports-and-statistics/reports/aug-2023/consultation-paper-on-review-of-voluntary-delisting-norms-under-sebi-delisting-of-equity-shares-regulations-2021_75335.html.
[4] Securities and Exchange Board of India, Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021 (Last Amended on August 3, 2021), available at https://www.sebi.gov.in/legal/regulations/aug-2021/securities-and-exchange-board-of-india-delisting-of-equity-shares-regulations-2021-last-amended-on-august-3-2021-_50517.html.
[5] Securities and Exchange Board of India, Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021 (Last Amended on August 3, 2021), available at https://www.sebi.gov.in/legal/regulations/aug-2021/securities-and-exchange-board-of-india-delisting-of-equity-shares-regulations-2021-last-amended-on-august-3-2021-_50517.html.
[6] Securities and Exchange Board of India, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, available at https://www.sebi.gov.in/legal/regulations/jul-2011/sebi-substantial-acquisition-of-shares-and-takeovers-regulations-2011-last-amended-on-march-14-2023-_34651.html.
[7] IPO Central, Biggest Holding Companies in India, available at https://ipocentral.in/biggest-holding-companies-in-india/.
[8]Navigating Delisting Mechanisms: Establishing Equity Among Shareholders and Acquirers, NLIU Law Review Blog (Dec. 14, 2024), https://nliulawreview.nliu.ac.in/blog/navigating-delisting-mechanisms-establishing-equity-among-shareholders-and-acquirers.
[9] Amendments to Voluntary Delisting in India: An Analysis, LiveLaw (Dec. 14, 2024), https://www.livelaw.in/articles/amendments-to-voluntary-delisting-in-india-an-analysis-266172.
[10] Navigating Delisting Mechanisms, supra note 8
Author: Gaurav Dhingra, BBA LLB (H) 9th Sem student at K.R Mangalam University, Gurugram, Haryana
