KPMG FLASH NEWS KPMG in India 14 April 2015 Amendments to SEBI Delisting and Takeover Regulations Background The Securities Exchange Board of India (SEBI) on 24 March 2015 has notified amendments to regulations governing Delisting, Takeovers and Share Buy-backs. The amendments to delisting regulations deal with applicability of regulations, price discovery, timelines, and responsibility and accountability of the board of directors of the company, shareholder participation in delisting, etc. The amendments are based on the discussion paper issued by SEBI in May 2014 dealing with issues highlighted by the stakeholders. Key Amendments I. SEBI (Delisting of Equity Shares) Regulations, 2009 [Delisting Regulations] Successful Delisting The Delisting Regulations provided that an offer for delisting is considered successful if post offer shareholding of the promoters (along with the persons acting in concert) is higher of a) ninety per cent of total issued shares excluding shares held by custodian towards issue of depository receipts or b) Aggregate percentage of promoter s pre-offer shareholding and fifty per cent of the offer size. It is now amended to provide than an offer for delisting should be considered successful, if a) Post offer shareholding of the promoters (along with persons acting in concert) is ninety per cent of total issued shares, excluding shares held by custodian towards issue of depository receipts; and b) Atleast twenty five per cent of the public shareholders, holding shares in demat account, as on the date of the meeting of the Board of Directors approving such delisting proposal, participate in the Offer. This requirement should not be applicable, if the acquirer and merchant banker demonstrate that they have delivered the offer letter to all public shareholders either through registered/speed post/courier/hand delivery with a proof of delivery or by e- mail etc. through a read receipt. Determination of Floor Price Under the Delisting Regulations, the Floor price was fixed only on the basis of listed prices in case of frequently traded shares and on the basis of other factors in case of infrequently traded shares It is amended to provide that the floor price shall be determined in terms of Regulation 8 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, thus also taking into consideration negotiated price and other factors.
Determination of Final Price Under the Delisting Regulations, the final price was determined as a price at which maximum number of public shareholders tenders their shares through Book Building process. The Merchant Bankers to furnish a report to the Board of directors certifying that: i) trading by the acquirer/promoter/ related entities was/was not in compliance with the applicable securities laws; and It is now amended to provide that the final offer price shall be the price upto which the aggregate number of shares offered, if accepted, will enable the shareholding of promoter/acquirer (along with persons acting in concert) to reach the prescribed threshold limit of ninety per cent. Additional Responsibility on the Board of Directors The amendment requires that prior to granting approval to the proposal of delisting, the Board of Directors of the company should: i) Make disclosure on the Recognised Stock Exchange (RSE) stating that promoters/acquirers have proposed to delist the company. ii) Appoint a merchant banker to carry out a due diligence and make disclosure to that effect on RSE. iii) Obtain details of trading in shares of the company, on market and off-market, by twenty five top shareholders of the company during two years preceding the date of board meeting and provide the same to the merchant banker. iv) Obtain further details relating to above, if required by the merchant banker. ii) the acquirer or promoter or promoter group or their related entities, were / were not in compliance with regulation 4(5) of the Delisting Regulations dealing with certain restricted transactions. Proposal for Delisting and Restriction It is amended to provide that the proposal for delisting should come from the promoters/acquirers. Under the Delisting Regulations there was no such requirement. Also under the Delisting Regulations only promoters were permitted to carry on the Delisting Process, the amended provisions also permits acquirer to carry on the Delisting Process. The amendment prohibits the promoter/promoter group from making a delisting offer if any entity belonging to them has sold equity shares of the company during a period of six months prior to the date of board meeting in which the delisting proposal is to be considered. The amendment prohibits promoters/ acquirers/promoter group from selling any shares in the company between the date of the Board meeting approving the delisting and the date of completion of the delisting process. v) While approving the proposal, taking into account the report of the merchant banker, the Board shall certify the following: a) the company is in compliance with applicable provision of securities laws; b) the acquirer or promoter or promoter group or their related entities, are in compliance with regulation 4(5) of the Delisting Regulations; and c) the delisting is in the interest of shareholders. Mode of Book Building Process The Delisting Regulations provided for creation of a separate window on stock exchange platform for the shareholders to submit their bids. However, the same was not part of the normal trading platform of the exchange. Consequently, the transaction was not subjected to securities transaction tax and the shareholders were not getting advantage of beneficial tax rate. It is now amended to provide that SEBI will provide share trading and settlement through stock exchange mechanism and the promoters/acquirers should provide such facilities to the shareholders. This will enable shareholders to avail beneficial tax regime.
SEBI (Buyback of Securities) Regulations, 1998 also is amended to provide similar benefit in case of buy-back. Substantial Reduction in timeline of Delisting Process The stock exchange to provide in principle approval within five working days from date of application as against thirty working days provided in the Delisting Regulations. Public Announcement to be within five working days from the date of the above approval as against thirty working days under the Delisting Regulations. Offer letter should be dispatched within two working days from the date of public announcement as against maximum period of forty five working days under the Delisting Regulations. Opening of offer to be done not later than seven working days from the date of public announcement as against fifty five working days. The series of above amendments in the timeline at various steps has compressed the overall time for the entire process from approximately One hundred and eighty days taken now to approximately ninety days. Delisting of small companies The Delisting Regulations provided special provisions for delisting of : a) companies with paid up capital of INR one crore and not having trading on stock exchanges for > one year and b) companies having three hundred or less shareholders holding less than INR one crore in paid up value of shares. It is amended to provide that special provisions apply only to companies which a) Has paid up capital of INR ten crore and networth not exceeding INR twenty five crores; and b) are not having trading on stock exchanges for more than one year; and c) are not suspended by the Stock exchanges for non-compliance during preceding one year. The exemption available to companies with less than three hundred public shareholders has been removed. Other Amendments In case of delisting process which has commenced before the date of amended provisions becoming effective but where Reverse Book Building process is not completed, such delisting process shall be undertaken in compliance with the amended provisions. SEBI is now empowered to grant relaxation from strict enforcement of any of the requirements of Delisting Regulations on being satisfied that the same is in interest of investors in securities and securities market. For seeking the exemption the promoters/acquirers are required to apply to the SEBI along with fees of INR fifty thousand. The Delisting Regulations provided that in case of failure of Delisting offer, Promoter shall ensure that minimum public shareholding is achieved within six months from closure of the bidding. This requirement has been removed. This may be non-consequential as companies with public shareholding below threshold limits are even otherwise required to achieve minimum shareholding level. II. Takeover Regulations SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations) provides for obligation and manner of making open offers on acquisition of shares or control of listed companies. However, if acquirer is interested in in delisting the company, he is required to follow separate process post completion of open offer. Key amendments to the Takeover Regulations in relation to delisting are as under: An Acquirer, who is required to make an open offer under Takeover Regulations, may instead make a delisting offer in accordance with the Delisting Regulations. The acquirer is required to declare his intention of delisting at time of making detailed public statement.
In case of a Competing offer, the acquirer is not allowed to delist the company. In case the Delisting offer is not successful as provided under the Delisting Regulations acquirer is required: a) To make an announcement within two working days of the failure. b) To continue with Open Offer process by filing Letter of Offer with SEBI within five days from the announcement of failure. c) To increase the Offer Price by a sum determined at the rate of ten per cent per annum for the period starting from the date on which consideration should have been paid as per original public announcement and the actual date of payment of consideration. In case of Delisting Offer is not successful shareholders who have tendered their shares under the Delisting Offer may withdraw the shares tendered within ten working days from announcement of failure. Also, the shareholders who had not offered their shares under Delisting Offer may tender their shares under the open offer. Similar to Delisting Regulations, It is now provided under Takeover Regulations that SEBI will provide share trading and settlement through stock exchange mechanism and the promoters/acquirers should provide such facilities to the shareholders. This will enable shareholders to avail advantage of beneficial tax regime. Our comments The amendment/s brought in the delisting, takeover and buy-back regulations are a welcome change for all the stake holders. The significant changes brought about in the delisting regulations, specially providing a tax friendly mechanism and reduced timeline, is expected to enhance participation in delisting offers. The option for delisting granted to the acquirer under takeover regulation does away with unnecessary duplication of processes.
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