Keywords: Voulntary delisting, SEBI, Price Discovery Mechanism
Aastha Saily[i]
Indian corporates have lost a sense of optimism over the past few months due to the economic slowdown brought upon them by the pandemic. Recently, the Indian stock market witnessed a multiyear low in the valuation of stocks. As a result, some listed Indian companies as well as various multi-nationals are voluntarily delisting their securities and going private. Vedanta Ltd. is one such company wherein the shareholders have approved the delisting plan. Reports suggest that United Spirits, Hexaware Technologies, Adani Power and several other companies have proposed or are otherwise planning to delist their securities to adapt to the situation.
Voluntary delisting is essentially a strategic move wherein the promoters (controlling shareholders) of a listed company decide to take the company private by purchasing its securities thereby removing it from the stock exchange. There are many reasons behind such a move, ranging from low trading volume and low market capitalisation to saving compliance costs incurred by publicly traded companies and restructuring plans. In India, delisting and in particular, voluntary delisting is primarily governed by the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 (the “SEBI Delisting Regulations”). This article aims to provide a holistic view of voluntary delisting and manifests concerns for the shareholders as well as the listed companies in the present regime.
The Process of Reverse Book Building
The SEBI Delisting Regulations lay down an exhaustive procedure to be followed by the companies for delisting. Since a sizable amount of public interest is involved in listed entities, the delisting regulations ensure the protection of shareholder’s interests, especially minority shareholders. However, there is a need for checks and balances in the present regulations to ensure that the delisting process is not jeopardized, and the public shareholders are not exploited on account of the present situation.
Approvals: The Board, Shareholders and Stock Exchange
Subsequent to due diligence carried out by a merchant banker registered with SEBI, the delisting process begins with the approval of the plan by the Board as required by Regulation 8 of the SEBI Delisting Regulations. Thereafter, the Board seeks the approval of its shareholders by a special resolution via postal ballot.
Once these approvals are obtained, the company applies for an in-principal approval from the recognised stock exchanges on which the equity shares of the company are listed at present. Surprisingly, the SEBI Delisting Regulations do not require the Board to offer the rationale behind the delisting via a report or otherwise. The only requirement is that the Board has to certify that the delisting is in the interest of the shareholders presumably relying on the due diligence conducted by the merchant banker, since the SEBI Delisting Regulations do not require any other assessment to be undertaken. This present norm is plausibly based on the assumption that the shareholders are only interested in the return on their investment, but it fails to address the shareholders who are long-term investors and are interested and involved in the future of the company. In order to serve the interests of larger category of shareholders, it is suggested that SEBI add additional disclosure requirements to be complied by the Board. The independent directors (or the Board) should be required to submit a reasoned report or recommendation emphasising the rationale of the delisting and the fact that the delisting is in the interest of the shareholders owing to current financial position of the company as required under Regulation 26 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“ the Takeover Code”). To ensure that the delisting process is completely transparent, the Board should give its views on a) the financial position of the company b) summary of the reasons for such recommendation c) the fairness of the price. Such a compliance is essential since the directors owe a fiduciary duty to act in the interest of the shareholders of the company. Considering the current situation, the introduction of a standard of due diligence conducted by the merchant bankers to bring forward any neglect would also be facilitative of the protection of shareholders.
Price Discovery Mechanism
The most disputed part of the delisting process is the determination of the final exit price. The offer price is determined through shareholders’ bids in accordance with Regulation 15 and Schedule II of the SEBI Delisting Regulations. This process of price discovery is known as reverse book building. The minimum price i.e. the floor price is calculated in terms of Regulation 8 of the Takeover Code. However, there is no maximum limit to the offer price.
In a bullish trend, delisting is a difficult task since the investors propose a hefty sum as an acceptable exit price. A case in point is the failure of BOC Group’s plan to delist its domestic arm Linde India in June 2019. During the pricing discovery mechanism, the minority shareholders asked for nearly three times the existing market price (and was more than four-and-a-half times the floor price). However, when a recession hits, corporates resorting to delisting have better chances of shareholders’ cooperation. The reasons for this are two-fold, firstly, because the benefits of remaining listed are outweighed by the harsh bearish market and secondly, the investors are more likely to settle for a reasonable price keeping in mind the falling business activities and valuations ahead. The present situation is no different.
The promoters can reject the offer made by the shareholders’ and can make a counteroffer not below the book value of the company as certified by the merchant banker. When the market is in a bit of a slump, the book value of companies can reduce substantially, whereas the intrinsic value i.e. the anticipated future value of the stock, might remain unaffected. This decrease in book value is usually reversible and the impairment is not permanent. This can be seen in the particular case of Vedanta Ltd., wherein the book value reduced from Rs. 185 to Rs. 146 which can be reversed in the future. It is therefore suggested that, SEBI should provide for a pricing mechanism not based solely on the book value but also on the intrinsic value of the stock. This will make the price methodology well equipped for the present situation so that the shareholders are not compelled to bid/ accept lower values for their stakes. A system, that would keep a balance between the profitability and future of the company and the interest of its shareholders. Additionally, if a large number of public shareholders consists of institutional investors or high net worth individuals, lobbying or privately transacting may swing the offer price adversely. It is recommended that SEBI should introduce a price mechanism where both intrinsic value as well as the book value form the basis for calculation of the counteroffer price and the same should receive a no-objection certificate from the regulator or stock exchange for the final price discovered to ensure fair valuation.. Alternatively, the company should be required to submit an opinion from an independent financial advisor or valuer on the exit price being fair and reasonable, as required in some developed markets (e.g. Singapore) to ensure equitable valuation in the present regime.
Threshold for Delisting
Even though, the delisting proposal is approved by shareholders having 75% shareholding, the minority shareholders have a significant say in the success of the proposed delisting. Regulation 17 of the SEBI Delisting Regulations provides for a high threshold for a successful delisting offer. It requires that the shareholding of the promoter (along with the persons acting in concert) taken together with the shares accepted through eligible bids at the final price determined should be at least 90% of the total shareholding. If the threshold is not met, the company remains listed.
Where the promoters plan to make the company private, they will be required to offer its remaining investors (10% or less) buyback of shares at a higher premium which could further scuttle the financial health of the company. Consequently, the promoters should be financially well prepared for such aftermath.
Reinstatement on the Stock Exchange
Delisting is an extreme step and the corporates might end up being adversely affected by it in future. Regulation 17 of the SEBI Delisting Regulations prohibits a company from raising funds from the public for at least 5 years after a delisting. Thus, it is important for the companies to not be solely influenced by the prevailing market price and come up with a plan to tackle the current situation by weighing all other options.
Conclusion
The SEBI prescribed norms for delisting give substantial rights to the shareholders in approval, price discovery and essentially the whole delisting process. However, in order to properly exercise these rights and make an informed decision, SEBI should introduce a few additional disclosure requirements to be complied by the Board. Based on the foregoing analysis, measures such as Board recommendations, greater standards of due diligence, opinions of independent advisors and the like measures, will give investors a better understanding and clarity of the process. Such measures will ensure that the shareholders know better than to accept the lowest book value offer price.
As far as the companies are concerned, the Board should evaluate the financial stress caused to the company in wake of the pandemic and decide whether to continue its trading since the market is picking up or to forgo large chunks of public funds for at least 5 years. The relaxations in compliances permitted by SEBI, Ministry of Corporate affairs and other departments in light of the pandemic, indicate an approach supportive of ease of doing business. Considering this, the companies might want to hold on to their present status of ‘listed entity’ and come up with other strategies to improve their standing.
It will be interesting to see how SEBI reacts to these scheming ventures of the companies and how will the delisting pan out for corporates.
[i] Aastha Saily is a fifth-year student of ILS Law College, Pune. For any discussion related to the article, she can be contacted via mail aasthasaily.7@gmail.com.
This article was co-edited by Arnav Maru (Co-founder and Managing editor) and Shruti Dhonde (Associate Editor).
Preferred Citation: Aastha Saily, "Voluntary Delisting: The Recent Trend and its Pitfalls", Arbitration and Corporate Law Review, Published on 19th July, 2020.
Very well written 👍 a good read