In a pivotal regulatory shift, the Securities and Exchange Board of India (SEBI) approved amendments to the SEBI (Delisting of Equity Shares) Regulations, 2021, on June 27, 2024. This amendment introduces the fixed price method as an alternative to the existing reverse book building (RBB) process for voluntary delisting. This initiative addresses the speculative trading and inflated exit prices that have troubled the RBB method, offering a clearer and more predictable pathway for companies and investors involved in the delisting process.
Historical Evolution of India’s Delisting Framework
Over the years, India’s delisting regulations have evolved to balance promoters’ and investors’ interests while maintaining market integrity. Initially, in 1998, SEBI introduced the fixed price method, where promoters offered a predetermined price to buy shares from public shareholders during voluntary delisting. Despite its simplicity, this method faced criticism for lacking transparency and potentially undervaluing shares, which often led to dissatisfaction among minority shareholders. The absence of competitive bidding meant that shareholders had little influence on the delisting price, sometimes resulting in prices that did not reflect the true market value of the shares.
In 2003, SEBI introduced the RBB process through the SEBI (Delisting of Securities) Guidelines. This method was designed to be more transparent and equitable, requiring promoters to discover the delisting price through an auction-like mechanism where public shareholders bid their shares at prices they considered fair. The final delisting price was determined based on these bids, ensuring that the exit price reflected market consensus. The RBB process was praised for enhancing transparency and fairness, giving shareholders a more significant voice in the delisting process.
Reintroduction of the Fixed Price Method alongside Reverse Book Building
SEBI’s recent amendments reintroduce the fixed price method alongside the RBB process, acknowledging the latter’s limitations and challenges. The fixed price method now mandates that the offered price includes at least a 15% premium over the floor price, protecting shareholders from undervaluation.
This decision aims to counteract the speculative trading and inflated exit prices that became prevalent under the RBB method. By offering both methods, SEBI provides flexibility to companies and investors, allowing promoters to choose the method that best suits their circumstances while ensuring shareholders receive a fair and transparent exit opportunity.
Limitations and Issues with the RBB Method
While the RBB process initially succeeded in bringing transparency to the delisting process, it faced several issues over time. One major concern is the increase in speculative trading around delisting events, leading to significant price volatility. For example, during the delisting of Hexaware Technologies in 2020, speculative trading surged after the promoter, HT Global, announced a delisting plan, causing significant price fluctuations and complicating the decision-making process for shareholders. Such volatility creates uncertainty for genuine investors and can distort the shares’ true value.
Additionally, the RBB process’s bidding mechanism often results in artificially inflated exit prices. Speculators and certain investor groups bid at unreasonably high prices, driving up the cost for promoters to delist their shares. This inflation makes the delisting process more expensive and leads to disputes and dissatisfaction among shareholders not involved in speculation. From 2009 to 2013, out of 38 companies that opted for delisting, 11 experienced premiums in the discovered price exceeding 100%. For instance, Brady and Morris Engineering Company’s delisting attempt in 2020 saw the exit price skyrocket to a 1128.70% premium over the floor price due to speculative bids, leading the promoter to reject the delisting proposal.
Between 2018 and 2023, there were 114 voluntary delisting attempts in the Indian market, with 28 being unsuccessful. Successful delisting attempts were more prevalent among small-cap companies, while mid-cap and large-cap delistings were rare. Common reasons for unsuccessful delisting attempts included insufficient tender of shares in the RBB process and acquirers rejecting the discovered price. Companies such as TTK Healthcare Limited and R Systems International Limited failed to meet the required tender threshold due to insufficient shares being tendered by public shareholders. Additional issues like group bidding, lack of small shareholder participation, and promoter manipulation have also plagued the RBB process.
SEBI’s Consultation Paper and Proposed Reforms
SEBI acknowledged these issues in a consultation paper, suggesting fixed price delisting offers under certain scenarios to mitigate excessively high discovered prices. The paper highlighted inefficiencies and challenges with the existing RBB process and sought public and stakeholder feedback to evaluate the feasibility and benefits of the fixed price method. The consultation emphasized the need for a more predictable and straightforward delisting process to address the concerns of all market participants, particularly retail investors.
Key Amendments in SEBI Delisting Regulations
Fixed Price to Include at Least a 15% Premium Over the Floor Price
One significant change in the delisting norms mandates that the fixed price offered to shareholders includes at least a 15% premium over the floor price, calculated in accordance with regulation 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This premium ensures shareholders are fairly compensated and incentivized to tender their shares during the delisting process, specifically applying to companies with frequently traded shares.
Introduction of an Alternative Delisting Framework for Listed Investment Holding Companies (IHC)
SEBI has also introduced an alternative delisting framework for listed IHCs. Under this framework, IHCs with at least 75% of their fair value (net of liabilities) in direct investments in equity shares of other listed companies can transfer these shares proportionately to public shareholders. IHCs are also permitted to make proportionate cash payments for other assets, such as investments in land, buildings, and unlisted companies. Upon extinguishing the entire public shareholding, the IHC will be delisted. This framework aims to simplify the delisting process for IHCs and align it with their unique asset structures, providing a clearer path for delisting while ensuring compliance with relevant financial sector regulations.
Counter-Offer Mechanism
Under the RBB process, the acquirer can make a counter-offer per regulation 22 of the Delisting Regulations. The threshold for making a counter-offer has been reduced from 90% to 75%, provided at least 50% of the public shareholding has been tendered. This change simplifies the process and makes it easier for companies to achieve delisting while ensuring substantial public shareholder participation. The counter-offer price must be at least the higher of the volume-weighted average price (VWAP) of the shares tendered or offered under the RBB process, or any indicative price offered by the acquirer, ensuring it reflects fair market value and safeguards public shareholders’ interests. Delisting is considered successful if promoter shareholding reaches 90% pursuant to RBB at the discovered price, which is acceptable to the promoter.
Introduction of Adjusted Book Value as an Additional Parameter
Adjusted book value will now be used as an additional parameter for determining the floor price for frequently and infrequently traded shares of companies under the delisting framework, excluding public sector undertakings from its purview.
Modification of Reference Date for Computing Floor Price
The reference date for computing the floor price under regulation 20(3) of the Delisting Regulations has been revised from the date of the board’s approval of the delisting proposal to the date of the initial public announcement of voluntary delisting. This change aligns the delisting process more closely with the Takeover Regulations’ methodology. These key changes in the delisting norms reflect SEBI’s commitment to creating a more balanced and transparent framework for voluntary delisting.
Concluding Remarks
SEBI’s reintroduction of the fixed price method provides a balanced approach to addressing the interests of both investors and promoters in the delisting process. This method mitigates the extreme volatility and speculative trading often associated with the RBB method, offering a fairer and more predictable exit for investors. By setting a predefined exit price with a required premium, SEBI ensures investors are adequately compensated without being subject to market speculation. This stability benefits retail investors, who may not have the same risk tolerance or market insight as institutional players.
Furthermore, the fixed price method fosters a more transparent and equitable market environment by reducing opportunities for market manipulation and speculative trading, maintaining market integrity and investor trust. Promoters benefit from a streamlined process that reduces the risk of delisting attempts failing due to unanticipated price inflations.
This method aligns with SEBI’s broader regulatory objectives of protecting minority shareholders while facilitating a conducive environment for business operations. By mandating a fair exit price, SEBI ensures smaller shareholders’ interests are safeguarded, promoting a more inclusive and balanced market. This regulatory approach helps maintain investor confidence, crucial for the overall health and stability of the capital markets. Overall, the fixed price method represents a move towards more straightforward and transparent delisting processes, potentially leading to higher completion rates of delisting attempts and a more stable market environment for such activities.
