Securities Laws
1) SEBI has, on 10.6.2009, notified new Regulations
relating to delisting of equity shares of listed companies. Essentially, they
provide for a detailed procedure for delisting and certain safeguards for public
shareholders. The new Regulations replace the earlier SEBI Guidelines of 2003.
2) The Regulations provide for different ways in which
delisting can take place. The most common one would be where it is voluntary and
initiated by the company and the promoters. Then there is a fast track but,
again, voluntary, delisting of defined ‘small’ companies. Under certain
circumstances, there can also be compulsory delisting. Finally, there are
residuary cases such as of BIFR companies, companies in winding up, etc.
3) Delisting means removal of listing of equity shares from
recognised stock exchanges. Thus, shareholders do not have any more a ready
market for their shares. Almost all shareholders — at least all the public
shareholders — buy shares on the assurance that there is continued listing.
Indeed, at the time of a public issue, the law requires that if listing does not
take place soon thereafter, the monies raised have to be refunded.
4) Listing provides significant advantages. There is a ready
market for the shares and this itself adds to the intrinsic value of a share.
Ready market provided by listing results in a better price since there are more
persons competing to buy the shares. Such wide and ready market also adds
further value to the shares on account of sheer liquidity whereby share-holders
can get virtually instant cash by selling their shares.
5) Listing is obviously advantageous to the company too as
funds can be raised easily and at a relatively lesser cost. However, the flip-
side is that there can be considerable costs and inconvenience requiring
compliance with SEBI requirements and corporate governance regulations. Hence,
companies look at delisting as an option. There are also many other reasons for
the company to consider delisting.
6) Considering space constraints, we would consider here
mainly, and even that too briefly, the Regulations where Promoters initiate
delisting.
7) Under the new Regulations, the procedure for voluntary
delisting is even more complicated and costly than earlier. It can be summarised
as follows :
a) The first step is taking approval of the Board and then
of the shareholders. There are 3 special features to be noted for the
shareholder approval. Firstly, the approval is required through postal ballot,
thus ensuring wide participation of share-holders. Secondly, the approval
needs a special resolution. Thus, at least 75% of those who vote have to vote
in favour of delisting. Finally, of the votes cast by public shareholders, at
least 2/3rds have to vote in favour. This is a new and interesting requirement
as it ensures potentially unfair and unpopular delisting proposals get nipped
in the bud.
b) The next step is taking in principle approval of stock
exchanges. This step will ensure that the broad feasibility of the proposal of
delisting would be tested relatively early. In fact, it could have been the
first step to ensure a basic test. The application has to be disposed of
within 30 days of receiving an application complete in all respects.
c) Then, the Promoters have to initiate the exit offer to
public shareholders within one year of the special resolution. This means that
the Promoters have to offer to buy shares of the public shareholders. ‘Public
shareholders’ means essentially share-holders other than the Promoters. This
is a sensible requirement as it allows the public shareholders to get their
monies rather than get stuck with illiquid shares.
The ‘offer price’ has to be at least the ‘base price’ that
is derived by a formula that takes into account quoted prices of the recent
past. However, this price is fortunately not binding. With this price as the
base, a procedure of book building is initiated where the public shareholders
quote the price at which they are willing to sell. If the prices and
quantities offered are such that the Promoters are willing and able to buy
either 50% of the total public holding or increase their holding to at least
90%, and they agree to do so, then the delisting is successful. If not, the
process fails.
d) However, it does not mean that the remaining
shareholders find their shares irrevocably illiquid. The Regulations require
that the Promoters should, over a further period of at least one year, buy the
remaining shares, if offered, at the same price.
• Using the
market price as benchmark for the offer price is defective and unfair to the
shareholders. Listing gives a signifcant premium to the shares. Conversely,
news of delisting results in the quoted price reaching nearer to the value
of an unlisted share. Since the formula for the base price relies on quoted
prices, the shareholders are thus deprived of a fair price.
e) In ‘book building’, there is obvious scope for
manipulation by both sides. The Promoters may line up some friendly public
shareholders to reach any one of the magic cut-off limit as above. On the
other side, shareholders may be tempted to ask for unduly high price and even
rigging and cartelisation has been alleged frequently in the past. There is no
downside for them obviously since even if they fail and if there are enough
shareholders offering a lower price, they can always get this price over the
next one year as the Regulations require the Promoter to keep the offer open
for another one year. Of course if too many shareholders do this, the
Promoters may simply exercise their option to withdraw.
f) SEBI has attempted to make the process fair and free of
manipulation. In particular, there are specific provisions providing that
there is no manipulation, fraud, deceit, etc. in the process by the Promoter
or any person.
8) Fast-track delisting of ‘small’ companies :
a) Special provisions are made for ‘small’ companies satisfying certain conditions and a relatively faster process is provided for delisting of shares of ‘small’ companies.
b) The basic benefit given is that the elaborate procedure for giving an exit offer would not apply and while such an exit offer still needs to be given, a faster and simpler procedure is provided for.
c) Small companies for this purpose would mean two types of companies :
- In the first type, there would be a company with a paid-up capital up to Rs. 1 crore and whose equity shares were not traded at all in any recognised stock exchange in the preceding one year.
- In the second type, there are 300 or lesser number of public shareholders and the paid-up value of shares held by such public shareholders does not exceed Rs. 1 crore.
d) Instead of the elaborate procedure for exit offer, a shorter process is provided for. An exit offer price is determined in consultation with a merchant banker. The offer is conveyed to the public share-holders. 90% of the public shareholders (Regulations are not clear but presumably 90% refers to value and not the number of public shareholders) need to agree either to sell their shares at the offer price or to continue to remain shareholders post-delisting. The offer document would also state that their agreement also includes an agreement to waive the book-building process for price-discovery.
9) Compulsory delisting :
a) Certain grounds for compulsory delisting may be prescribed by rules made pursuant to Section 21A of the Securities Contracts (Regulation) Act, 1956. Needless to add, there would need to exist strong grounds to do this and where the continuance of listing may be found to be more harmful than delisting and consequent loss of market for the shares.
b) Apart from existence of such serious grounds, the decision for compulsory delisting is to be taken by a panel of the stock exchange, consisting of 5 members including a representative of small investors.
c) Compulsory delisting does not mean that the Promoters escape the requirement of buying out the public shareholders. A fair price of the shares is worked out and the Promoter is required to pay such price to the public shareholders to acquire their shares. The Regulations do not provide for a time limit for carrying out such purchase. That apart, the Company, its Promoters and all companies promoted by them, and whole-time directors would be debarred from accessing the capital market or seek listing of their shares for ten years after delisting. One wonders, though, whether this requirement can be enforced in practice since typically the Promoters of companies facing such serious charges may default even on these further requirements.
Poser: Whole-time director could be an employee holding stock options or having a small holding, who could change his job. How will this requirement impact him and the company he joins?
10. Miscellaneous provisions and points:
a) Two stock exchanges – BSE and NSE for now – are specified as nationwide stock exchanges. If delisting is sought from other than these and where listing continues on one or both of such exchanges, the process is simpler and, importantly, the require-ment of making an exit offer is waived.
b) If delisting is pursuant to a scheme sanctioned by BIFRand if such scheme lays down the procedure for delisting or provides for an exit option to the public shareholders, then the Regulations shall not apply.
c) A minimum period of 3 years should have passed after listing before an application can be made for delisting.
d) A peculiar feature of the Regulations is that the exit offer is required to be given by the Promoters. No funds of the Company shall be used directly or indirectly. Buyback of shares as a means of delisting is specifically prohibited. This is strange and even absurd. Delisting is the reverse of listing. In case of listing, usually, it is the Company that issues shares to the public and receives monies for such issue. In case of delisting, the process ought to be the opposite – the Company should repay the monies back to the shareholders. If, during listing, the Promoters do not get any money, how can they be expected to raise money to buyout the public shareholders? Also, delisting does not recognise a professionally managed company where. there are no Promoters. Does that mean that shares of such companies cannot be voluntarily delisted ?
e) Under the exit offer, the Promoter is required to place 100% of the minimum offer consideration in escrow in cash by way of bank guarantee. Even after buying out the shareholders who offer their shares in the first round, the Promoter will need to maintain the escrow to provide for the remaining shareholders who have option to offer for a period of one year. This is sensible new requirement but, for the Promoters, this results in blocking of funds or maintenance of bank guarantee for one year.
Conclusion:
a) Reading the Regulations, one wonders whether SEBI thinks complexity is equivalent to comprehensiveness. While many provisions are made in enormous detail, some principle and vital issues are ignored. The pricing formula continues to be unfair as Promoters can literally offer the shareholders the option of the proverbial devil and deep sea – either accept the offer price or get your shares delisted (even the middle ground of rejection of delisting suffers from the company’s shares being under the stigma of potential delisting and thus quite possibly under-quoted). On the other side, forcing the Promoters to raise funds from outside the Company for delisting is inappropriate and is a breeding ground of corruption. The Regulations also effectively punish compliant companies making them undergo the elabora te procedure and payment for the exit offer while ‘vanishing’ companies escape both the procedure as well as the payment. Thus, while one recognises the thoughtful small touches at many places, the Regulations, that have come after more than a decade of consideration, disappoint as a whole.
