Animesh Chaturvedi*
INTRODUCTION TO THE FIXED PRICE MECHANISM
The Securities and Exchange Board of India (Delisting of Equity Shares) (Amendment) Regulations, 2024 ("Delisting Amendment Regulations") represents a significant shift in the country's delisting framework. The amendments aim to streamline voluntary delisting processes, offer acquirers greater strategic flexibility, and simplify valuation methods for determining delisting prices. However, the deeper implications of these changes for minority shareholders, corporate governance, and market integrity remain largely unexplored.
The most noteworthy feature of the Delisting Amendment Regulations is introducing a fixed price mechanism for delisting, in addition to the traditional Reverse Book Building ("RBB”) process. On the surface, this mechanism appears to simplify the delisting process by offering acquirers the option to bypass the cumbersome price discovery method under the RBB process, where shareholders hold significant power to drive up the delisting price. This change aims to reduce delays and make the process more efficient.
However, this raises fundamental concerns from a legal and corporate governance perspective. The RBB process was designed to protect minority shareholders, allowing them to influence the final price by tendering shares at a price they deem fair. The fixed price mechanism, which sets a predetermined price (subject to certain conditions), could dilute this protection. The key question here is whether efficiency should be prioritised over shareholder protection, which will be discussed in further parts of this article.
In a country like India, where corporate governance standards are still developing compared to mature markets, regulatory frameworks must strike a careful balance. In this article, the author weighs the complexity of the new escrow requirements and its potential impact on the dynamics of the RBB process over shareholder influence, critically analyses the delisting valuation through the adjusted book value method and finally, how hybrid transactions' allowance might result into protracted disputes while pricing of shares.
THE DELISTING VALUATION CONUNDRUM: NAVIGATING NEW VALUATION METRICS
One of the more technical yet pivotal changes introduced by the Delisting Amendment Regulations is introducing the adjusted book value method as an additional pricing parameter for frequently traded shares. This method considers consolidated financials, allowing for a more nuanced calculation of a company's worth. While this may seem like an improvement in terms of accuracy, it introduces new complexities in delisting bids.
The adjusted book value method mirrors the valuation method under Rule 11UA of the Income Tax Rules, 1962. As with any new valuation method, its effectiveness will depend on how market participants implement and interpret it. From a legal standpoint, there is a potent risk of a rise in valuation disputes. Given the intricacies of calculating adjusted book value, especially while considering consolidated financials, acquirers and shareholders may find themselves locked in legal disputes over what constitutes a fair price.
This could delay delisting bids and erode the efficiency that the new regulations seek to foster. Additionally, this valuation method's reliance on historical financial data may overlook market sentiment or a company's future potential, leading to undervaluation in certain cases. For example, companies with significant future growth prospects or intangible assets (like intellectual property) may find their share prices underappreciated under this model. This again shifts the balance of power towards acquirers, giving them the upper hand in negotiations.
The Securities Exchange Board of India ("SEBI”) may need to issue supplementary guidelines or clarifications on how the adjusted book value method should be applied in practice. Alternatively, introducing a review process by independent valuers or creating an appeal mechanism for valuation disputes could act as safeguards against potential abuses of this new pricing model.
ESCROW ACCOUNT REQUIREMENTS: CLARIFYING OR COMPLICATING THE LANDSCAPE?
The Delisting Amendment Regulations clarify the escrow account requirements for delisting bids by specifying that acquirers must deposit twenty-five percent (25%) of the total consideration in an interest-bearing account within seven (7) working days. While this provision appears straightforward and largely clarificatory, it introduces new dynamics into the financial planning of acquirers.
The key issue is whether the liquidity pressures introduced by this requirement might discourage smaller acquirers, particularly those in financially strained positions from pursuing delisting. Large, well-capitalised acquirers may not feel the pinch of this requirement, but for companies with tighter margins or those dealing with significant debt, tying up twenty-five percent (25%) of the consideration in escrow could have a chilling effect on their ability to pursue delisting.
Further, these requirements could potentially lead to financial disputes, especially when the delisting process is prolonged, and acquirers find it difficult to meet the timelines. SEBI might need to introduce penalty waivers or extend timelines in cases where unforeseen delays occur. In doing so, regulators would ensure that the escrow requirements remain a tool for protecting shareholders rather than a financial hurdle that limits market activity.
COUNTEROFFER DYNAMICS IN THE REVERSE BOOK-BUILDING PROCESS
The Delisting Amendment Regulations allow acquirers to make a counteroffer during the RBB process if the threshold of seventy-five percent (75%), reduced from the previous limit of ninety percent (90%), is met, providing flexibility to negotiate with shareholders, subject to the condition that at least fifty percent (50%) of the shareholding is tendered. While this provision seems to create room for more dynamic negotiations, it also raises the question of whether such flexibility undermines the price discovery mechanism that the RBB was originally designed to uphold. The core issue with the counteroffer provision is whether it tips the scales too heavily in favour of the acquirer.
The counteroffer mechanism raises concerns that shareholders may feel compelled to accept a lower price, particularly when the acquirer holds significant influence over the company. This creates a power imbalance where the acquirer can manipulate the bidding process, driving the price to more favourable levels. From a regulatory standpoint, SEBI might need to consider additional safeguards to ensure that the counteroffer provision does not dilute the power of shareholders in determining a fair price. For instance, requiring detailed disclosures on the basis of the counteroffer or establishing a minimum price threshold could enhance transparency and fairness in the process. Mandating that counteroffers include detailed disclosures about the basis of the revised price and perhaps even setting minimum acceptable thresholds for counteroffers to prevent acquirers from gaming the system might accommodate minority shareholder interests during a delisting.
HYBRID TRANSACTIONS: A DOUBLE-EDGED SWORD FOR ACQUIRERS AND SHAREHOLDERS
One of the more intricate provisions of the Delisting Amendment Regulations is the allowance for acquirers to engage in hybrid transactions, combining open offers with delisting attempts. While this flexibility offers acquirers a strategic advantage, it introduces legal complexities that could undermine the delisting process's efficiency.
The hybrid model allows acquirers to attempt delisting twice—once at a fixed price in the open offer stage and again under the RBB process if the first attempt fails. While this may seem like a boon for acquirers, it could create protracted disputes over pricing, particularly if the fixed price in the open offer stage is perceived as undervalued. Moreover, the ability to reattempt delisting within twelve (12) months introduces market uncertainty, as shareholders wonder whether the company will make a second delisting attempt at a different price. SEBI should consider imposing time limits or stricter conditions on hybrid transactions to prevent market manipulation. This would ensure that acquirers do not exploit the dual-delisting option to unnecessarily drive down prices or prolong the process. Transparency in the pricing methodology for hybrid transactions will be key to maintaining market confidence.
CONCLUSION
The Delisting Amendment Regulations reflect a significant evolution in India's capital markets. Still, their success will hinge on balancing the competing interests of efficiency, shareholder protection, and corporate governance. By addressing the highlighted challanges and introducing reforms prioritising transparency and fairness, SEBI can ensure these amendments achieve their intended purpose without creating new vulnerabilities in the delisting framework. For acquirers and shareholders alike, the next few years will determine whether these amendments foster a more equitable and dynamic market or deepen existing imbalances.
(*) Animesh Chaturvedi is a third-year student of law and humanities at the National Law Institute University, Bhopal. For any discussions related to article, he can be contacted via email at: animeshchaturvedi3@outlook.com.