“…this is not Hotel California” (i.e. India’s new fixed-price offer mechanism to delist public companies)

The Securities and Exchange Board of India has decided to simplify the delisting process for public companies in India by allowing fixed-price delisting offers as an alternative to the current requirement to determine the delisting offer price through the reverse book-building method.

“Why would we say that once you are listed you can never leave… this is not Hotel California,” Securities and Exchange Board of India (SEBI) Chairwoman Madhabi Puri Buch said while addressing a press conference after the SEBI board meeting on June 27, 2024. “It is a rich, vibrant market. We welcome people, but if for some reason they have to leave, they must be allowed to do so,” she added.

The latest move by SEBI is a welcome development as delisting offers in India have had mixed results in recent years. It is expected to simplify the process of acquiring private companies and boost public M&A activity.

EXISTING METHOD OF BUILDING AN INVERTED BOOK

This existing method of determining the offer price in a delisting offer, known as the “reverse bookbuilding method,” involves inviting public shareholders to submit bids for the sale price of their shares. The delisting offer price would be the price at which at least 90% of all outstanding shares could be acquired, based on the sale prices indicated in such bids.

However, this often led to a complex and uncertain delisting process, where the delisting prices offered included a very high premium. Some delisting processes also witnessed market manipulation by significant shareholders, including stockpiling to influence the exit price. These factors complicated the take private process in India, often resulting in unsuccessful delisting offers.

PROPOSED FIXED PRICE METHOD

SEBI has now decided to allow a bidder whose shares are frequently traded to fix a proposed delisting price in advance (as an alternative to the price determined through reverse book building). The bidder can now use either of these methods.

The fixed price should be established as follows:

It should include a premium of at least 15% over the ‘floor price’ specified in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, as amended (Takeover Regulations).
The “floor price” under the takeover rules is the highest price among various reference points, including (1) the volume-weighted average market price of the shares in the previous 60 trading days and (2) the volume-weighted average price paid by the purchaser or persons acting jointly for the shares in the previous 52 weeks.
In addition to the above benchmarks, SEBI has now included an additional benchmark – the adjusted book value of the shares, as certified by an independent valuer.

As before, the delisting offer will be deemed effective if (1) the purchaser is able to acquire at least 90% of all issued shares and (2) more than 75% of the shareholders, including approximately 66.66% of the public shareholders, consent thereto.

HIT

Several multinational companies with large stakes in their Indian subsidiaries are likely to take advantage of this simplified delisting process to take such subsidiaries private. Delisting of such subsidiaries will have immediate benefits such as avoiding extensive public disclosure requirements for a number of events and avoiding public shareholder approval requirements for several matters, including related party transactions.

This article has been prepared for the general information of interested persons. It is not exhaustive in nature and should not be considered legal advice. We are not authorized to provide advice on Indian law and if such advice is required we will cooperate with an Indian law firm.

(Show source.)