India: SEBI Eases Delisting Norms – Major Impetus For Take-Private Transactions

Last Updated: 15 February 2019
Article by Shreyas Bhushan, Rohan Singh and Simone Reis
  • Amendment to the SEBI (Delisting of Equity Shares) Regulations, 2009 ("Delisting Regulations") notified to, inter alia, implement a proposal described in its June 16, 2018 discussion paper to enable promoters to provide a counter-offer as a part of the reverse book building process.
  • Reference date for determining floor price for delisting offer is modified.
  • Grey areas remain on situations where an acquirer may not act in concert with a promoter in a delisting.

A. BACKGROUND

2018 has seen a phenomenal rise in take-private transactions globally, and private equity spending this year on these transactions is the highest over the last decade.1 However, despite the global trend, delisting transactions are seldom successful/ initiated in India largely because of the prohibitive pricing involved. The reverse book building process2 (a unique price discovery mechanism under the Delisting Regulations, abbreviated as "RBB") is capable of easy manipulation and as a result, between the financial years 2015-2016 and 2017-2018, only 15 companies have voluntarily delisted in India.3

In order to address this concern and promote a vibrant take-private market, SEBI floated a discussion paper earlier this year (explained below) and identified the key price issues under the Delisting Regulations. Following through on the discussion paper, SEBI has now relaxed the pricing criteria to make delisting more practical and implementable.

B. INCEPTION OF A SOLUTION? SEBI'S JULY 2018 DISCUSSION PAPER

On July 26, 2018, the Securities and Exchange Board of India ("SEBI") published a discussion paper on delisting of equity shares and review of the RBB process ("Discussion Paper"),4 highlighting stakeholders' concerns with the implementation of the RBB process and how the RBB process could thwart genuine delisting attempts.

The key of concerns dealt with in the Discussion Paper are summarized below:

  1. Arbitrage Seekers and Shareholder Groups: The delisting price could be influenced by new shareholders who acquired equity shares of the company proposing delisting by acquisition in the secondary market, and then bidding exorbitantly high. Further, existing shareholders had the ability to form groups and collectively submit exorbitantly high bids;
  2. Promoters selling to complicit 'friends': Promoters could sell a stake in the company to friends, who would then bid at (lower) prices recommended by promoters to influence the RBB price;
  3. Floor price fixation: It was noted that this process only prescribed a floor price without prescribing a higher price (i.e. a price band, as used in initial public offers), and did not consider other aspects which could influence the delisting prices such as (a) the company's fundamentals, or (b) market sentiments;
  4. Book value not considered: The RBB process under Regulation 8 of the Delisting Regulations did not consider the book value of the listed company, and there were instances where the book value could be substantially higher than the exit / delisting price arrived at using the RBB process.

In the Discussion Paper, SEBI stated that introducing a price band would not be in the interest of investors, and accordingly proposed introducing the ability of acquirers and promoters in a delisting process, who disagree with the reverse book-built price, to make a counter-offer with a price not lower than the book value of the equity shares of the listed company.

C. DELISTING AMENDMENT REGULATIONS

On November 14, 2018, SEBI notified the SEBI (Delisting of Equity Shares) (Second Amendment) Regulations 2018 ("Amendment") pursuant to which certain key changes (as explained below) were made to the Delisting Regulations.

Introducing a counter-offer, but limited to book value

Earlier, once the RBB price was discovered, the only option available to an acquirer who did not agree with the RBB price was to reject it and withdraw from the delisting. However, with the introduction of the Amendment, acquirers now have an additional option to propose a counter-offer to public shareholders within 2 working days of the RBB price being determined. The only caveat is that the counter-offer price should not be lesser than the book value of the listed company, as certified by a merchant banker.

This change is certainly a step in the right direction, since delisting offers can no longer be defeated by small groups of shareholders with vested interests by quoting exorbitant prices in the RBB process. Therefore, so long as 90% shareholders are agreeable to a fair price provided by the acquirer, the delisting can still be successful. However, we fail to understand the rationale for restricting the counter-offer price to a price not less than the book value of the listed company. There are two reasons for this:

  1. prescribing book-value as the floor price may not always be beneficial for public shareholders, as there are several asset-light companies (especially in the IT/ ITeS sectors) which are valued significantly higher than their book-value. Similarly, asset-heavy companies may be reeling under extreme losses, and book-value may not be an accurate reflection of a fair price for such companies. Hence, in our view, book-value as a 'one size fits all' floor price should not be mandated;
  2. it is important to note that the counter-offer price is not binding, and shareholders still have the ability to reject it if it does not reflect a fair price. Since shareholders already have this ability, prescribing an additional floor price based on the book-value seems redundant.

Change in the 'Reference Date'

The Delisting Regulations currently provide that the floor price for the RBB process will be determined using the process as per the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Regulations"). Under the Takeover Regulations, the floor price is calculated by identifying the historic price for prescribed look-back periods. The look-back period starts from the date of the public announcement (of a tender offer).

The Amendment now adds an explanation to clarify that the reference date for computing the floor price would be the date on which the recognised stock exchange should have been notified of the board meeting in which the delisting proposal would have been considered. Regulation 29 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires a listed company to notify the stock exchange of a board meeting in which a proposal of voluntary delisting from such stock exchange is considered at least 2 working days in advance (excluding the date of the intimation to the stock exchange and the date of the board meeting).

While this concept works well for a delisting initiated by an existing promoter under the Delisting Regulations, for delisting offers initiated by non-promoter acquirers through the Takeover Regulations, this requirement could potentially result in post-announcement price exposure (i.e. increased floor price). Hence, it would be ideal to clarify that for delisting offers through the Takeover Regulations, the reference date will be the date of the public announcement (in line with the principles under the Takeover Regulations).

D. CONCLUSION AND ANALYSIS

The amendments to the Delisting Regulations are undoubtedly game-changing, and will certainly facilitate genuine take-private transactions (as explained above). However, there are still certain grey areas which remain unaddressed.

Firstly, there are several provisions which require an 'acquirer'/ 'promoter' to ensure that 'public shareholders' are provided an exit opportunity. In addition, the term 'Public Shareholders' excludes both the 'acquirers' and 'promoters' (along with their 'persons acting in concert'). Given this, in case where the 'acquirer' is not a 'promoter'/ acting in concert with the 'promoter/ promoter group', conceptually, the existing promoter should also be a public shareholder and should be given an exit opportunity.

Secondly, there are several provisions which focus on the role of 'public shareholders' (eg: specific 'public shareholder' approval required for delisting, 'public shareholders' need to be sent the letter of offer etc.). In case of a delisting initiated by a third party acquirer as explained above, the existing 'promoters' will fall out of all these protections provided to 'public shareholders'. Hence, appropriate amendments should be introduced to ensure fair treatment of the existing promoters.

Thirdly, and importantly, SEBI should also clarify its stance on how an 'acquirer' who acts in concert with the existing 'promoter' under the Delisting Regulations will be treated under the Takeover Regulations. SEBI in the past has held that 'acquirers' acting in concert with the existing 'promoters' under the Delisting Regulations will also be considered as persons acting in concert with the promoters under the Takeover Regulations (irrespective of whether the 'acquirers' and 'promoters' actually act in concert for any purpose other than for delisting).5 This is a major impediment for private equity investors to explore delisting transactions by joining hands with the promoters, and should be appropriately addressed.

Footnotes

1 https://pitchbook.com/news/articles/pe-is-spending-more-than-ever-on-take-private-add-ons

2 The RBB process fixes the delisting price by considering the price at which the 90% shareholding threshold is achieved in the delisting offer, subject to such price being higher than a prescribed floor price.

3 "Discussion Paper on Delisting of Equity Shares – Review of "Reverse Book Building Process"", available at: https://www.sebi.gov.in/reports/reports/jul-2018/discussion-paper-on-delisting-of-equity-shares-review-of-reverse-book-building-process-_39712.html, last accessed on November 21, 2018.

4 Ibid.

5 Informal Guidance in the case of IDFC Capital Limited, dated August 07, 2012

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions