Indian Voluntary Delisting Amendments: An Analysis

Justification for voluntary delisting from the stock exchange

The controlling shareholder can decide to deliberately delist the equity shares of a company from the Indian stock exchanges using a process known as voluntary delisting. This basically means that a company listed on the Indian stock exchanges is voluntarily delisted from the exchanges. In India, delisting can also happen involuntarily, in which case the regulators delist the equity shares for non-compliance with the listing requirements. Controlling investors use this as a key financial structuring technique across the world to enhance the value of their investment.

A more detailed discussion of the proposed changes is provided below.

(1) Overview of the Reverse Book Building (RBB) Process

The RBB covers the submission of bids for shares and the submission of bids by public shareholders during the offer period. After the offer closes, the bids are used to establish the price at which the total purchaser’s share, including the shares submitted by shareholders (Shareholders after the offer), equals 90% or more of the total number of shares outstanding; if the purchaser’s Post Offer Shareship falls below 90%, the delisting offer is deemed to have failed. If this last condition is met, the calculated price — known as the uncovered price — is the price at which shares are accepted in qualifying offers. Once the purchaser accepts the uncovered price, the delisting offer is deemed to have been successful.

The buyer may make a counter-offer if the discovered price is unacceptable to him, provided that the price he offers is at least equal to the book value of the company. If the buyer’s share after the offer reaches 90%, the counter-offer will be considered effective.

As per the Proposed Amendments, the SEBI Board has authorized the implementation of fixed price procedure instead of RBB method for delisting of companies whose shares are frequently traded. The fixed price of the buyer must be at least 15% higher than the floor price. Accordingly, the exit price can be determined by the buyer using reverse book building approach or fixed price method.

The lowest amount that the acquirer has to pay to the common shareholders for the shares offered is called the reserve price. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Regulations)in particular Regulation 8, must be complied with when calculating the reserve price under the Delisting Regulation. Under the Proposed Amendments, the reserve price will be set taking into account the adjusted book value of the listed company, as confirmed by an independent valuer.

(a) The framework of the counterproposal

Buyers may make counteroffers under the Delisting Regulations if their Post-Offer Shareholding is at least 90% of the company’s total outstanding shares. This criterion provides leeway in the event of a delisting offer failure even in situations where a majority of the public shareholders may in fact support the delisting plan. It also gives the majority shareholders the ability to influence the process. Such failure also prevents buyers from making a counteroffer. Furthermore, the Delisting Regulations provide no guidance in the process of determining the counteroffer price, other than the company’s book value, which is the minimum criterion.

Under the proposed amendments, if the shares after the offer in the reverse bookbuilding process exceed 75% (assuming that at least 50% of the public shareholders have made an offer), the acquirer may make an early counter-offer. However, the delisting will not be effective until the acquirer’s total shares after the offer reach 90%. The counter-offer price cannot be less than the higher of (a) the volume-weighted average price of the shares offered; and (b) the indicative price, if any, offered by the acquirer.

(b) Determination of the reference date

The reserve price is set by the Delisting Regulations using a reference date, which is the date on which the exchanges must be notified of the board meeting at which the delisting application was approved. There is a risk of unusual trading activity that could disrupt the calculation of the reserve price between the date of notification to the exchanges and the public announcement of the purchaser’s delisting proposal or prior notification to the exchanges in the case of a promoter-led delisting.

To address this issue, the SEBI Board has adopted the practice of applying the ‘undisturbed price’ or fixing the floor price on the date on which the details of the proposed delisting are first published. As a result, the date of the first public announcement or the date on which the stock exchanges are notified in advance has been adopted as the reference date.

(2) Introduction of the fixed price mechanism

At present, the only available method for determining the price of voluntary delisting under the Delisting Regulations is the RBB procedure. The SEBI Board, through the Proposed Amendments, has replaced the RBB with a fixed price mechanism, which has been widely welcomed as a much-awaited development. The said scheme is intended to alleviate concerns about the price uncertainty associated with the RBB process and the subsequent increase in volatility and speculative activity in the company’s shares. The objective is to give shareholders greater control over whether to offer their shares at the price indicated and to make the amount of money required for this purpose more visible so that the purchaser can plan ahead.

Only those companies whose shares are frequently traded under the Takeover Regulations will be eligible for the proposed fixed price method. In terms of price, a delisting offer will be deemed to be successful if the Post-Offer Shareship reaches the 90% criterion and the fixed price is not below the floor price specified by the Delisting Regulations. In addition, during the specified cooling-off period, acquirers or promoters who have previously opted for delisting but failed to do so may submit a delisting offer through the fixed price mechanism.

(3) Opinion

One of the many features of a well-functioning stock market is the smooth delisting of listed companies from the open market. The current delisting procedure in the Indian stock market is far from efficient, given the history of failed delisting offers.

In light of this, the proposed amendments are a commendable first step toward speeding up the delisting process. The common thread across all the suggestions is the emphasis on establishing an ecosystem that increases the likelihood that a delisting offer will be accepted in its entirety. To do this, friction must be reduced, the process must be redesigned to meet shareholder expectations, and external influences such as the influence of majority shareholders, speculative trading activity, and market volatility must be minimized. The modifications made to the pricing techniques also appear to be aimed at ensuring a fair exit for public shareholders.

In summary, it is difficult to find much fault with the Proposed Amendments, which aim to eliminate subjectivity and ambiguity surrounding the delisting procedure. Moreover, market participants have long demanded and justified the use of a fixed pricing structure. While this can be seen as a positive move in general, it is not clear what the practical aspects and difficulties of such a process will be.

Views are a personal matter.