30 June 2021
The SEBI (Delisting of Equity Shares) Regulations, 2021 (“2021 Regulations”), were notified on June 10, 2021. The new regulations do not substantially deviate from the SEBI (Delisting of Equity Shares) Regulations, 2009 (“2009 Regulations”). However, certain incremental changes are introduced that further refine and streamline the delisting process. The key changes effected by the 2021 Regulations, with specific reference to voluntary delisting offers, are as follows:
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Compliance with the Regulations
The lines between the Acquirer and the Company were slightly grey in the 2009 Regulations. The 2021 Regulations make it clear that the Acquirer and persons acting in concert with it are responsible for compliance with the regulations. The process commences with the announcement by the acquirer of its intention to delist as opposed to a board resolution of the Company. The role of the Company is merely that of a facilitator (on the lines of the SEBI Takeover Regulations). The 2021 regulations also expressly stipulate that the expenses for the delisting offer should be borne by the Acquirer (and not the Company).
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Role of the Board of Directors
Unlike the 2009 Regulations, where the Board was seemingly front ending the delisting offer process, the 2021 Regulations impose an independent role to the Board of Directors. On receiving the Acquirer’s intention to delist, the Board is required to appoint an independent company secretary to conduct due diligence and submit a report, certifying that the dealing in the equity shares of the company by the acquirer, its related entities and the top 25 shareholders is in compliance with the applicable securities laws. On the lines of SEBI Takeover Regulations, upon receipt of the detailed public announcement, the Board is also required to constitute a committee of independent directors to provide its reasoned recommendation on the delisting proposal.
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Indicative Price
The 2021 Regulations provide statutory sanction to the market practice of the acquirer disclosing an indicative price at which it is willing to accept the bids. The indicative price cannot be less than the prescribed floor price.
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Success Threshold
The threshold for a successful delisting offer remains the same – i.e. the post offer shareholding of the acquirer, along with the shares tendered/ offered by public shareholders, accepted as eligible bids at the discovered price or the counter offer price, should reach 90%. However, in calculating this threshold, shares held by the following persons will not be included – (a) custodian; (b) a trust for implementing employee benefit scheme; and (c) inactive shareholders. Moreover, for a successful delisting offer, the requirement that at least 25% of the public shareholders, holding shares in the demat mode, should have participated in the book building process has been done away with.
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Counter Offer
The concept of a counter offer by the Acquirer in case the Acquirer is not willing to buy the shares at the discovered price has been retained. As in the previous regulations, the counter offer cannot be at a value less than the book value of the shares. The new regulations provide clarity on the method of calculation of book value. The book value is to be determined basis the consolidated and standalone financial statements, whichever is higher, as per the latest quarterly financial results filed by the company with the stock exchanges.
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Withdrawal of the Offer
The 2021 Regulations make it clear that the Acquirer is bound to accept the equity shares tendered in the delisting offer, if the discovered price is equal to the floor price or the indicative price, if any, offered by the acquirer. The indicative price is binding on the acquirer and he is obliged to acquire the shares at that price, if the delisting threshold is met, even if the discovered price is lower.
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Special Provisions
The Delisting Regulations provides for special provisions for a subsidiary company getting delisted through a scheme of arrangement, provided the listed holding company and the subsidiary company are in the same line of business. Here, the subsidiary can continue as an unlisted company and the listed shares of the holding company will be issued in lieu of subsidiary’s shares that will be cancelled. Whilst this provides flexibility for future structures, it comes along with a condition that no further restructuring shall be undertaken by the listed holding company for a period of three years, which appears to be onerous. Special provisions have also been provided for delisting of companies listed on the innovators growth platform.
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Additional Rights of Public Shareholders
The contents of the public announcement and letter of offer largely remain the same. Under the 2021 Regulations, the public shareholders now have the additional right to inspect the documents referred in the letter of offer. Moreover, in participating in the offer, public shareholders can create a lien in favour of the Manager to the Offer as opposed to depositing the shares.
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Reduction in Escrow Amount
The Acquirer is now required to deposit 25% of the total consideration (as opposed to 100% of the total consideration). This amount is calculated on the basis of the floor price/ indicative price (as the case may be). The balance 75% is required to be deposited before making the detailed public announcement. The concept of a special account has been done away with. Upon determination of the discovered price and making of detailed public announcement, the Acquirer is required to deposit additional sums, sufficient for payment of consideration to public shareholders. Additionally, in case of failure of the delisting offer, the modalities of release of funds from the escrow account back to the Acquirer, have been clearly spelt out.
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Payment of Offer Consideration
Where discovered price is equal to the floor price or the indicative price, the payment is required to be made through the secondary market settlement mechanism for the dematerialised shares, whereas if the discovered price is more than the floor price or the acquirer chooses to pay a price higher than the discovered price, the payment is required to be made within five working days of the public announcement, disclosing the success of the RBB process. The Acquirer will be liable to pay interest at 10% per annum to all the shareholders whose bids are accepted, but who are not paid the requisite price within the abovementioned timelines.
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Depositary Receipts
Whilst the 2009 Regulations was silent on the delisting of depository receipt from foreign jurisdictions, subsequent to the delisting of shares of a listed company in India, the Delisting Regulations provides that after delisting of shares in the home jurisdiction, the listed company should delist all of its depository receipts issued overseas and change them into the underlying equity shares in the home jurisdiction, after termination of the depository receipts programme, within one year of such delisting.
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Role of the Manager to the Offer
The 2021 Regulations have expanded the role of the manager to the offer. It includes the obligation to (a) exercise diligence, care and professional judgement to ensure compliance of Delisting Regulations; (b) ensure that the contents of public announcement, letter of offer and post-offer advertisement are true, fair and adequate in all material aspects; (c) ensure that firm arrangements for funds through verifiable means have been made by the acquirer to meet the payment obligations under the delisting offer; and (d) disclosure of outcome of RBB process.
Additionally, the manager to the offer (in coordination with the acquirer) is required to undertake the following to protect the interest of the remaining public shareholders who have not exited, pursuant to the delisting offer – (a) file quarterly progress reports to stock exchanges, disclosing (i) number of remaining shareholders at the beginning and end of the quarter; and (ii) shareholders who availed the exit opportunity during the quarter; (b) send follow up communications to the remaining shareholders on quarterly basis; and (c) publish advertisement inviting remaining shareholders to avail the exit opportunity, on a quarterly basis, during the one year exit window.
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Cooling Off Periods
The cooling off period for relisting post voluntary delisting has been reduced from five years to three years (except certain specific cases). Further, in the event of failure of a delisting offer, the Acquirer will not be permitted to make another delisting offer for six months.
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Process Timelines
Strict timelines have been laid out for the initial public announcement by acquirer, notification to the company, holding of the board meeting, shareholders’ meeting, application for stock exchange in-principle and final approvals, deposit and release of funds from the escrow account, making a counter offer, closure of bidding period and announcement of results and return of shares tendered. In most cases, the timelines have been contracted, enabling a quicker completion of the process.
For further information, please contact:
Akila Agrawal, Partner, Cyril Amarchand Mangaldas
akila.agrawal@cyrilshroff.com
