India: Corporate & Commercial Monthly Newsletter | July 2021

SEBI revises delisting rules and revamps public M&A in India

On June 10, 2021, SEBI introduced the SEBI (Delisting of Equity Shares) Regulations, 2021 to turn the process more investor friendly as well as safeguard shareholders' interest. The delisting regulations paves the way for a streamlined, timebound and transparent process, while addressing certain lacunae in the erstwhile regulations. The proposed regulatory framework is expected to make M&A transactions for listed companies more rational.

Key changes proposed:

• Disclosure by the acquirer: Acquirer will be required to disclose an intention to delist the company by making an initial public announcement.
• Eligibility for delisting:
  • The company should have been listed for 3 years
  • No outstanding securities that are convertible into equity shares required to be delisted
  • The acquirer should not have sold shares of the company six months prior to making the initial public announcement
• Floor price and indicative price: The new norms specify that the indicative price must be higher than the floor price. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 have set a minimum price for delisting which is disclosed as the 'floor price'. Now, the acquirer has the option to disclose an 'indicative price' (higher than floor price) which can also be increased until the bidding commences.
• Reverse book-building process and determination of discovered price: Discovered price is the price at which shares accepted through eligible bids takes the shareholding of the acquirer to at least 90% of the company's share capital. Delisting fails if the 90% threshold is not met.
• Financial arrangements for a delisting offer: Prior to commencing the delisting offer process, the acquirer must ensure that their financial arrangements will be able to fulfil the payment obligations. It is mandatory for the acquirer to set up an escrow account and deposit the total consideration amount in phased manner.
• Exit Period for residual shareholders: After a successful delisting, for one year (exit period) the acquirer is obliged to acquire shares voluntarily tendered by the residual shareholders at the final delisting price.
• Delisting under the following special provisions:
  • Delisting of shares on Innovators Growth Platform
  • A subsidiary company getting delisted through scheme of arrangement wherein the listed holding entity and the subsidiary company are in the same line of business
  • Delisting by operation of law

The fresh norms emphasize on incremental improvements by plugging the gaps in the erstwhile regulations. The hasslefree framework is a stimulant for taking privates and therefore public M&A in India. The enhanced disclosures will instill confidence among the shareholders and ease the earlier complex procedure of voluntary delisting.

Reforms with checks and balances in valuation reports and fairness opinions could achieve an outcome for potential investors as well as public shareholders and timebound procedure will also help the companies to take an exit from the stock exchanges and explore their business opportunities by going private.

E-Commerce Rules - Proposed amendments and implications

The Consumer Affairs Ministry has proposed significant amendments (Proposed Amendments) to the Consumer Protection (E-Commerce) Rules, 2020 (Rules). The Proposed Amendments have been kept open for stakeholder comments. Key aspects of the Proposed Amendments are as follows:

• Definition of e-commerce entity: The proposed change casts a wider net to cover two additional categories of persons within the purview of 'e-commerce entity':
  • A person engaged by an e-commerce entity for fulfilment of orders would now be counted as an ecommerce entity as well
  • Any 'related party' of an e-commerce entity as per the Companies Act, 2013 (Act), would also be an ecommerce entity
  
  While these changes seem intended to bring third party logistics entities within the applicable regulatory fold, this could be a large envelope that will potentially cover the related party entities of the wide swathe of business houses who might own/operate/manage an ecommerce facility/platform but also have other diverse business interests.
• Bar on flash sales: The proposed definition of 'flash sale' has the expected references to reduced prices and high discounts as well as such sales being organized by fraudulently intercepting ordinary course of business using technology. This will enable only certain seller(s) managed by the e-commerce entity to undertake flash sales and can potentially hurt inventory-based ecommerce entities, some of whom may have a genuine need to clear inventory and improve cashflows. The most worrisome parts are the absence of metrics for what would constitute 'fraudulent interception' and 'ordinary course of business'.
• Prohibition on mis-selling and misrepresentation: Misselling has been introduced as a prohibited activity, premised upon deliberate misrepresentation of information to a user. However, when defining misrepresentation, one criterion states 'causing, however innocently, a consumer to purchase such goods or services, to make a mistake as to the substance of the thing which is the subject of the purchase'. The use of 'however innocently' creates an absolute burden of compliance that is naturally difficult to achieve. Furthermore, its usage also appears contradictory to the notion of 'deliberate misrepresentation'.
• Fall back liability: Introduced particularly for marketplace model entities, the definition proposes to make the entity liable to a user who faces loss due to commissions, omissions and negligent conduct towards such user by a seller registered on the marketplace platform.
• Registration of e-commerce entities: The nodal body for this would be the Department for Promotion of Industry and Internal Trade. If this does come into effect, further details for the process would be expected from the regulator. At present, the complete procedures remain unknown.
• Clamp down on misleading users: An e-commerce entity has been barred from allowing display or promotion of misleading advertisements, whether in the course of business on its platform or otherwise. While this is good for the users, it has wide ramifications for a marketplace entity and also creates fall back liability for a seller who might have placed a misleading advertisement. To what extent a marketplace entity would have the ability to evaluate such advertisements or obtain back-to-back protection from a seller is a matter to ponder. Another example is for the e-commerce entity to not mislead users by manipulating their search result/index. Once again, it is difficult to test for what could be construed as manipulation and whether such search result/index indeed misled a user (because search results would have to appear in some sequence or the other).
• Deeper compliance and grievance redressal: Ecommerce entities have been mandated to increase points of redress, with the Proposed Amendments mandating the appointment of a Chief Compliance Officer and a Resident Grievance Officer. There is some doubt on whether the Resident Grievance Officer is the same as Grievance Officer that is currently contemplated in the Rules. In addition, there is also the obligation to appoint a nodal contact person (other than the Chief Compliance Officer) for 24x7 coordination with law enforcement. It can be debated whether the space where this law is intended to operate requires a 24x7 coordination with law enforcement agencies or if this might be a compliance and cost burden on an e-commerce entity. Furthermore, there are additional provisions pertaining to increased information disclosures about products and their sourcing, as well as restrictions against consumer information being shared.
• Abuse of dominant position: No e-commerce entity that holds a dominant position in any market shall be allowed to abuse the same. This is a reiteration of a positive protection for consumers and smaller players. However, what would constitute market remains unclear (as it could cover product market, product category market, retail market and similar variables). From a competition law perspective, it may require the e-commerce entity (who may or may not have deep pockets) to keep evaluating if it holds a dominant position in different market segments; and yet reconcile to possible regulatory scrutiny/investigation.
• Disclosure of cross-sell data: The Proposed Amendments mandate disclosures on cross-sell data by the e-commerce entity to users. While this is a good to have, it may not be of particular benefit to users or their purchasing needs.
• Additional obligations for marketplace entities: There are a host of obligations likely to have repercussions on business models and fulfilment of FDI norms specifically for a marketplace entity, such as:
  • Obligation to ensure that none of its related parties or associated enterprises are enlisted by it for sale to consumers directly. While the restriction of B2C sale is understandable, there is inconsistency in defining 'related party'. The term 'associated enterprise' in the Proposed Amendments has a wider import than the Act's definition of 'associate company'. One possible reason may be that the Proposed Amendments intend to snap certain business models that could be considered circumvention of the spirit, if not the letter, of the existing law.
  • Ensure that its related parties/associated enterprises do nothing that the entity itself would not be permitted to do. One such example is related parties and associated enterprises of the marketplace entity are not supposed to listed as sellers on the marketplace platform.
  • Ensure that any information the marketplace entity collects through its platform is not used for unfair advantage of its related parties and associated enterprises. There are questions that this raises. For instance, can it be presumed that the information is supposed to be only of users, since the parent law is for consumer protection, and could information of other third-party sellers be used? Would data/information that a user or a third-party seller has consented to sharing with the marketplace entity be off limits for data analytics? What would constitute 'unfair advantage'; and would superior data gathering and analytics as a means of business development be construed as such?

There is food for thought aplenty in the Proposed Amendments, not just for large marketplace entities but smaller players as well as inventory model operators. In addition, logistics entities as well as end-consumers will also notice that there are aspects that unintentionally have the potential of causing confusion. As various stakeholders continue to evaluate the Proposed Amendments, it is clear that they need to be put under a microscope for some fine tuning.

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