[This blog post was first published at indiacorplaw.com]
The delisting process is presently regulated by the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 (‘Delisting Regulations’). The Securities and Exchange Board of India (‘SEBI’) on 26 July 2018 issued with a Discussion Paper on Delisting of Equity Shares-Review of ‘Reverse Book Building Process’ proposing changes in the valuation of shares under the same. This post addresses the proposed changes while offering an overview of the present law, the concerns, the proposals and the author’s view on the proposed changes.
Present Law
The Delisting Regulations recognize voluntary and compulsory delisting. ‘Voluntary delisting’ is delisting of equity shares of a company voluntarily on an application made by the company; and is regulated under Chapter III of the Delisting Regulations. A company can either delist its equity shares from (a) all recognized stock exchanges wherein it has listed its equity shares or (b) one or few recognized stock exchanges wherein it has listed its equity shares. While the latter does not require the company to provide an exit offer to the existing shareholders, the former mandates an exit offer to the shareholders holding equity shares of the category proposed to be delisted. This exit offer has to be executed through the process of reverse book building (‘RBB’).
The RBB is a mechanism used to capture sell orders from shareholders. Here, the acquirer or company offers to buy back shares from the shareholders. This mechanism involves a period in which the RBB is open and offers are collected from shareholders at various prices, which are above or equal to floor price and the buy-back price is determined after the offer closing date. Delisting is regarded as successful if promoter shareholding reaches 90% pursuant to this process at the discovered price which is acceptable. If the discovered price is unacceptable to the promoter, it can refuse to buy back the shares and the delisting procedure collapses.
The floor price is determined in terms of regulation 8 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 the (‘Takeover Regulations’). This is, in most cases, different from the market price of the shares. A peculiarity of these Regulations is that they do not provide a price band but only a floor price. A shareholder can bid at any price above the floor price. These considerations have caused some issues both to the promoter as well as the shareholders.
Floor Price and Book Value Difference
In the current market conditions, the floor price based on criteria laid down under the Takeover Regulations may not be reflective of the price expected by the promoter and as per the Delisting Regulations. The Takeover Regulations consider the volume-weighted average market price of shares for a period of 60 trading weeks in order to arrive at the fair price for frequently traded shares.[1] The value arrived at is not always correct and indicative of book value which is equal to its carrying value on the balance sheet and is calculated by netting the asset against its accumulated depreciation. SEBI has in its consultation paper highlighted its case-study in this regard analyzing companies that have undergone delisting and the results show a huge margin between the fair value calculated and the book value.
Concerns
SEBI’s proposal is friendly to small shareholders as the current provisions of RBB, such as the lack of upper limit on bid prices left such investors at a loss in terms of estimating the value. There is a danger of a few groups of shareholders having large shareholding influencing the process resulting in the collapse of delisting, thereby denying small shareholders a chance to exit. The influence of arbitrageurs, speculators and friendly shareholders leading to unrealistic pricing has been another concern. All of these concerns affect the promoter since under the extant law it can only either accept or reject the determined price.
Proposal
In order to avoid the delisting process becoming fruitless, SEBI has proposed that the promoter be allowed to make a counteroffer to the shareholders of the class and if the counteroffer is lucrative to the shareholders, the delisting should be treated as successful. Such a counteroffer cannot not be less than the book value and it should be accepted by such number of public shareholders whereby the promoters shareholding reaches 90%.
Comments
Manipulation by shareholders holding large stakes may take a toll on a promoter desiring to delist who is effectively held, hostage. The proposed addition will deliver some indication to the small shareholders the price at which the promoter is agreeable to buy out the shares for.
This is also projected to restrict the formation of a false market which will eventually be detrimental to the shareholders who may buy shares in the market at high prices only to realize these may not get accepted when they tender in the offer.
The anticipated addition to the valuation method in RBB is a welcome step forward for the protection of promoters who wish to delist as well as small investors who wish to exit. This will bring in a balance to meet the increasing gaps between the book value and fair price arrived at under RBB.
Voluntary delisting has been looked at favourably by SEBI in this consultation paper. The proposed right to counter offer by the promoter would help at arriving at a fair value – in a truer sense.
[1] Frequently traded shares are those that are traded with a turnover of shares which is greater than or equal to 10% in the last twelve calendar months.