SEBI made some much needed changes to its delisting regulations in March 2015, including reducing overall timelines for a delisting offer, allowing significant acquirers to make a consolidated delisting cum takeover offer, and revising the price discovery mechanism. This reflects a more market friendly approach towards delisting offers, which is a marked shift from 2009 (when the delisting regulations come into force).
The Securities and Exchange Board of India (SEBI) recently amended the SEBI (Delisting of Equity Shares) Regulations 2009 (Delisting Regulations) and made corresponding changes to the SEBI (Substantial Acquisition and Takeovers) Regulations, 2011 (Takeover Regulations)
The amendments have been made by SEBI following its discussion paper on the Delisting Regulations issued in May 2014. SEBI had then noted that the overall delisting activity in the Indian market had reduced considerably after introduction of the Delisting Regulations, and that changes were required to address concerns such as: (i) potential for market manipulation under the price discovery process; (ii) lack of investor participation; and (iii) the time consuming nature of the entire process. Accordingly, after receiving comments from various market participants on the discussion paper, SEBI has approved and notified the amendments.
The key highlights of the amendments are as follows:
(i) Price Discovery Process: The Delisting Regulations required that the final offer price that must be paid to the public shareholders in a delisting offer must be determined by a reverse book building process. Before the amendments, this reverse book built price was the price at which the maximum number of shares were tendered by the public shareholders in the delisting offer. The amendments have modified this reverse book build process. Going forward, the final offer price will be the highest price at which the shares tendered in the delisting offer result in the acquirer's shareholding reaching 90% (assuming that the various prices at which shares are tendered by the public shareholders in the offer are arranged in ascending order).
(ii) Floor Price for Delisting Offer: The method of arriving at the floor price for a delisting offer has been revised. This is now the same as the method for determining the floor price in an open offer under the Takeover Regulations.
(iii) Takeover-Cum-Delisting Offer: Prior to the amendments, under the Takeover Regulations an acquirer could make a delisting offer only after an open offer under Takeover Regulations was complete. Further, if the open offer resulted in the acquirer holding more than 75% of the ownership of the target company, then the delisting offer could have been made only after a cooling off period of 12 months had passed. An acquirer is now allowed to specify its intent to delist in the detailed public statement issued under the Takeover Regulations and directly approach the target company to proceed with a voluntary delisting. No open offer or cooling off period is required. However, if the delisting attempt is not successful, the acquirer will be required to make an open offer to the public shareholders under the Takeover Regulations. The price initially determined for the open offer (at the time of its public announcement) will have to be enhanced by an interest rate of 10% (ten percent) per annum for the duration of the delay caused by the failed delisting offer.
(iv) Reduction of Timelines: The aggregate timeline for completing a voluntary delisting process has been reduced from 137 calendar days to 76 working days.
(v) Stock Exchange Platform: SEBI has allowed public shareholders to use the stock exchange platform for tendering shares in a delisting offer, thereby making it more tax efficient.
(vi) Due Diligence: The merchant banker is required to provide a due diligence certificate on the trading activities of the acquirer group for a period of two years prior to the delisting offer and confirm that (a) their trading activities have been in compliance with applicable securities laws, and (b) they have not carried out any transaction to facilitate the success of a delisting offer that was fraudulent, unfair or manipulative.
(vii) Board Responsibility: SEBI has imposed additional obligations on the board of directors of a company making a delisting offer, including, (a) making appropriate stock exchange disclosures, and (b) reviewing trades of the top 25 shareholders of the company for a period of two years prior to the date of the board meeting where the offer is considered.
IMPACT OF THE AMENDMENTS
The changes to the Delisting Regulations were sorely needed. The reduction of overall timelines for a delisting offer and streamlining the offer process will help both acquirers making a delisting offer and the public shareholders. Allowing an acquirer triggering the open offer obligations under the Takeover Regulations to directly make a delisting offer is a significant step as it will facilitate strategic mergers and acquisitions in listed companies. Previously, an acquirer who acquired between 50% and 75% of a listed company was required to make an open offer to the public shareholders for at least 26% and subsequently, if required, dilute its shareholding to below 75% within 12 months of the open offer to meet the minimum public shareholding requirement for listed companies.
As mentioned above, there have been few successful delisting offers in India so far. The primary reasons why delisting attempts failed in the past are:
- failure to obtain approval of at least 2/3rds of the public shareholders for a delisting offer;
- the acquirers rejecting the final offer price determined by the reverse book build process, which allowed investors holding a significant block of the shares to dictate the price; and
- the acquirers' shareholding not reaching 90% since the shares tendered by the public shareholders in the offer did not result in the requisite numbers. Interestingly, these delisting offers did however coincide with increased trading volumes of its shares on the stock exchanges.
By modifying the reverse book building process and extending the stock exchange platform for tendering shares in a delisting offer, SEBI has addressed a few of the issues affecting such offers. However, the requirements of obtaining an approval of 2/3rds of the public shareholders and the acquirers reaching the 90% ownership threshold for a successful delisting still remain. Therefore, the true success of the amendments towards facilitating delisting offers in the Indian market will have to be measured over time.