The Securities and Exchange Board of India (“SEBI”), after much deliberation, replaced the 2009 SEBI Delisting Regulations with the SEBI Delisting Regulations in 2021. The current delisting regime is essentially under two routes, (i) voluntary delisting by the exiting promoters under the SEBI Delisting Regulations, and (ii) delisting by non-promoters/ third party acquirers under Regulation 5A of the SEBI Takeover Regulations.
Despite the replacement of the 2009 Regulations with the 2021 Regulations and the amendments to Regulation 5A of the SEBI Takeover Regulations, there is still a compelling need to amend the current delisting regime as most delistings fail due to outdated requirements that are still required to be mandatorily followed.
If we have an agenda of pushing ‘ease of doing business’ as a country, then the same cannot be achieved unless there is ease of doing deals. Law makers need to appreciate that there are many commercial reasons why a company should be delisted and it is not in the interest of public shareholders to forcibly keep companies listed, especially when there is little or no trading in the securities of such companies or when the business of the company no longer justifies its continued listing. To maintain the integrity and stability of the Indian securities market, both listing and delisting of securities should be a smooth process.
Given the above background, we propose the following key substantive changes:
A. Replace RBB completely with a ‘fixed price’ regime
Present position: The price at which a company can stand delisted is discovered through the reverse book building (“RBB”) process (essentially, a bidding process), under the SEBI Delisting Regulations. RBB is a bidding process where the discovered delisting price is the price at which shares tendered through eligible bids takes the total shareholding of the acquirer to 90% of the total issued capital of the company. If the acquireraccepts the discovered price and pays all the public shareholders whose bids are accepted in the RBB, then the delisting is successful.
Analysis: Some public shareholders can disproportionately influence the outcome of the RBB process since achieving the 90% threshold is a pre-requisite for a successful delisting. Deal data demonstrates that this small minority of public shareholders demand an unreasonable delisting price, which is often rejected by the acquirer. The larger public shareholder base, who had tendered their shares at reasonable price and sought a possible exit from the company, suffer because the delisting offer fails. This can be demonstrated through the fact that majority of the delistings have failed, both under the 2009 Delisting Regulations and the present Delisting Regulations, for this very reason.
The current delisting regime in India is such that most third-party investors and even the exiting promoters do not want to even attempt delisting through either of the routes. Even when an investor or promoter decides to attempt delisting, the price discovered through the RBB process is so high that it is or would most likely be rejected by the investors since it is not commercially justifiable. RBB is the main reason why most delisting attempts are unsuccessful or not even attempted in India. Therefore, successful delisting is uncommon but it should not be the case. Just as one has the freedom to list a company (if a good case for going public can be justified), freedom to delist should also exist, and the existing outdated regime should be repealed. There is no need for sentimental attachment to outdated regulatory principles.
Proposed amendment: The RBB process is now outdated and should be done away with, whether the delisting is attempted under the Delisting Regulations or under Regulation 5A of the Takeover Regulations. SEBI should replace the RBB process completely with a ‘fixed price’ regime. The fixed price should be disclosed upfront in the initial public announcement for delisting. The SEBI can prescribe a methodology for determining such fixed delisting price, on the lines of minimum pricing regime applicable in an open offer under the SEBI Takeover Regulations. The acquirer should have the option to offer a higher delisting price if the acquirer deems it commercially fit.
The immediate question that arises is, how are public shareholders protected? The question is already answered in the current regime as public shareholders have dual protection which they will continue to have in such a fixed price regime, namely (i) 66.66% of the public shareholders will need to approve the fixed delisting price through a shareholder resolution i.e. it’s a super majority of minority that need to approve the proposal and price; and (ii) participation in the offer would be optional for public shareholders. The delisting would be successful only if sufficient shares are tendered by public shareholders to reach the delisting threshold of 90% shareholding.
This regime will eliminate subjectivity in the delisting process for public shareholders and the acquirers. This will also prevent a small minority of shareholders from hijacking the delisting process to the disadvantage of the larger public shareholder base who want an exit.
B. M&A transactions after delisting
Present position and analysis: In case of completion of any M&A transaction after successful delisting, at a price higher than the delisting price, the acquirer is required to pay the differential price to the public shareholders. This requirement is not mentioned in the existing regulations, but arises from the Essar Oil-Rosneft precedent. The promoters of Essar Oil were required to pay the differential to the public shareholders even though the sale of Essar Oil closed 1.5 years after successful delisting. This was because the sale to Rosneft was completed at a price higher than the price paid to the public shareholders under the delisting. In the absence of any specific time limit or specific regulations, it creates uncertainty in the market for parties contemplating M&A transactions involving delisted companies.
Proposed amendment: SEBI can specify a time limit of 6 (six) months after successful delisting, during which if an M&A transaction is announced where the price proposed to be paid to the sellers is higher than the price paid to the public shareholders in the delisting, only then the obligation to pay the differential amount should arise. In this context, by ‘M&A transactions’ we mean those transactions where the control is passed on to the purchaser. This time limit would be in line with the existing framework for open offers under the SEBI Takeover Regulations.
C. Allow existing promoters to continue as co-promoters
Present position: As mentioned above, the Regulation 5A route is used by non-promoters/ third party acquirers who sign a deal to buy out the existing promoters and propose to delist the company so that such acquirers essentially do not acquire a listed entity. The explanation to Regulation 5A(1) of the Takeover Regulations provides that:
“Explanation 2: The acquirer shall not acquire joint control along with an existing promoter/ person in control of the company.”
Analysis: Regulation 5A currently does not allow existing promoters to be even technically classified as co-promoters or be a part of the promoter group after the offer. Therefore, the existing promoters must necessarily be de-promoterised. The transacting parties do not have the flexibility to structure the transaction to achieve certain commercial objectives, which may be critical for both the transaction and the continuity of business and functioning of the company. E.g., the new acquirer may want one of the existing promoters to hold a key managerial position in the target company for a specific period of time. A transition or handover period during which the sellers/ existing promoters help the acquirer to better understand the mechanics of the business, ensure smooth transition of management and minimise business disruption is a common transaction structure used worldwide. This is also in the interest of the company and all its stakeholders, including public investors and employees. However, Regulation 5A of the Takeover Regulations, read with Regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, will not allow the existing promoters to be reclassified and continue in a key managerial position.
Proposed amendment: The regulation should allow existing promoters to be technically classified as “co-promoters”, but with the clarification that (i) the outgoing promoters should hold 10% or less equity stake in the company; and (ii) operational and sole control shall be with the incoming/ new promoter only.
D. Time period for compliance with MPS Requirement
Present position and analysis: If a delisting under the Regulation 5A route fails and due to the completion of the open offer, the total promoter shareholding exceeds the maximum permitted promoter shareholding (“MPS Requirement”), then, under Regulation 5A(6) of the Takeover Regulations, the third party acquirer has two options:
(i) attempt a voluntary delisting within 12 months, with higher delisting thresholds and higher price. If such delisting fails, then the acquirer has a further 12 months to comply with the MPS Requirement; or
(ii) comply with MPS Requirement within 12 months of completion of the Regulation 5A offer.
As mentioned above, delisting is a difficult and expensive process with low chances of success. Therefore, the chances of an acquirer attempting or applying the higher thresholds prescribed under Regulation 5A(6) makes this delisting even more difficult. Hence, the only viable option is for the acquirer to comply with the MPS requirement within 12 months from the completion of the failed Regulation 5A delisting offer.
Deal data suggests 12 months is not sufficient to comply with the MPS Requirement. Acquirers generally end up either being in violation of the MPS Requirement or sell their shares at a loss to meet the MPS Requirement.
Proposed amendment: Regulation 5A should allow for a longer period of at least two years to comply with the MPS Requirement. In two years, if the business does very well, the market price could rise, allowing the possibility of a profitable sale rather than a forced sale at a loss.
E. Compulsory buyout of residual shareholders
Present position and analysis: In many instances, after a successful delisting, the privately held delisted company is left with a significant number of residual public shareholders. These shareholders collectively hold generally up to 7% of the share capital of the unlisted company. While percentage-wise, this number may seem small, numerically it is a large number. In practice, such delisted companies are then forced to incur a lot of expenditure for shareholder related actions, such as issuing notices and holding shareholder meetings. Moreover, the residual public shareholders have no advantage in continuing with an illiquid stock and have no role in the management or running the business of the unlisted company.
Proposed amendment: Acquirer should have the ability to compulsorily acquire the residual shareholders (at the delisting price paid to the rest of the shareholders), within 30 days from the end of the mandatory one-year exit offer of a successful delisting.
*The authors were assisted by Arnav Shah, Principal Associate