1 A R T I C L E Analysis of Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 by Bhavyan Dalal and Yogesh Chande* 2008 and first half of 2009 of Indian securities markets witnessed a growing trend of companies delisting its securities from the stock exchanges, thanks to sluggish capital markets and rock bottom valuations. In the first 6 months of 2009 alone, approximately 12 to15 companies were able to delist. However, with the new delisting regulations introduced by Securities and Exchange Board of India (SEBI), namely Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 (Delisting Regulations) replacing the Securities and Exchange Board of India (Delisting of Securities) Guidelines, 2003 (Delisting Guidelines) with effect from June 10, 2009, it is not difficult to predict that Indian securities market may now witness few companies opting for voluntary delisting due to stringent norms. In this article we have tried to analyze the reasons for delisting, why delisting is more common with foreign owned companies, highlight reasons why we may witness only few companies opting for voluntary delisting going forward. Reasons for delisting After analysis of major delisting offers we have seen that primarily, companies delist to achieve any or all of the objectives highlighted below: Freedom from the purview regulators in different jurisdictions; Freedom from public scrutiny; Greater flexibility in decision making process; Preference of listing only in home country; In sync with global policy of being closely held; Offer opportunity to minority shareholders to exit on account of illiquidity of the security. Delisting and foreign owned companies An analysis of major delisting offers (INR 200 mn above) made from January 2005 to July 2009 reveal that approximately 60% of the companies delisted had a foreign parent. We believe that one of the main reasons to delist Indian subsidiaries is that foreign owned companies do not want to be regulated in multiple jurisdictions and would prefer minimal compliance when they operate outside their home jurisdiction. *Bhavyan works for an investment banking outfit in Mumbai and Yogesh is practicing law and is working with a law firm in Mumbai. Views of the authors are personal. The authors can be reached at bhavyandalal@gmail.com & yogeshchande@gmail.com 1
2 ARTICLE (contd..) Impact of Delisting Regulations Particulars Delisting Guidelines, 2003 Delisting Regulations, 2009 Approval of shareholders Approval through special resolution at the shareholders with[1]. The resolution is said to be successful provided ap- Requirement of shareholders meeting has been dispensed meeting. proval of the shareholders has been obtained through postal ballot i.e. a special resolution being passed with 2/3rd of the public shareholding voting in favour of the resolution, excluding the promoter shareholders). In-principle approval required from the Stock Exchange prior to commencement of the Reverse Book Building Process (RBB Process). Delisting when successful Acquire such number of shares Shareholding of promoter should reach higher of the following: so as to cross the minimum level of public shareholding as may be applicable, under 90% of the total issued shares (excludin clause 40A of the equity listing g shares held by custodian / against which depository receipts have been issued overseas); agreement. OR Participation in the RBB Process Aggregate percentage of pre-offer promoter shareholding (along with persons acting in concert) and 50 % of the offer size. Only demat shareholders i.e. All public shareholders i.e. shareholders holding securities in holding securities in electronic dematerialized and physical form. mode. Revision of price by bidders Upward or down ward revision Downward revision of price not permissible and no revision permissible during the RBB of price permissible on the last day of RBB Process. Process. Reinstatement of delisted Possible after 2 years. securities Possible only after 5 years in case of voluntary delisting and only after 10 years in case securities are delisted compulsorily. Penal provisions in case of No specific clause. compulsory delisting We have attempted to highlight the impact of changes made by SEBI in the Delisting Guidelines through the Delisting Regulations: Company, whole time directors, promoters and the companies which are promoted by any of them cannot directly or indirectly access the securities market or seek listing for any equity shares for a period of 10 years from the date of compulsory delisting. 1 Though in practice there were precedents of companies seeking approval of the shareholders through postal ballot. 2
3 Particulars Delisting Guidelines, 2003 Delisting Regulations, 2009 Determination of Floor Price If frequently traded Average of 26 weeks traded price from date of public announcement If infrequently traded Offer price to be determined by promoter and merchant banker on parameters like RONW, EPS, P/E etc. If frequently traded Higher of average of weekly high / low of closing prices during 26 weeks or 2 weeks, preceding from date on which Stock exchanges were notified of the board meeting in which the delisting proposal was considered. If infrequently traded on all the Stock Exchanges Floor price to be determined on parameters like RONW, EPS, P/E and peer valuation etc. If infrequently traded on some of the Stock Exchanges Highest price arrived in accordance with all the parameters listed above. Bidding Period Minimum 3 days. Minimum 3 days and maximum 5 days. Mention of Cap / Indicative No specific clause for cap / indicative price. However, many cating the same. However, promoters are prohibited Delisting Regulations do not expressly prohibit indi- price by Promoter for delisting delisting offers in the past indicated the same in the public tive or manipulative. from engaging in any act or practice that is decep- announcement and bid letter. Tail Period post delisting 6 months from date of delisting. 12 months from the date of delisting. Delisting through rights issue There was a specific provision in There is no such specific provision in the Delisting the Delisting Guidelines which Regulations[2] and hence not permitted. permitted delisting pursuant to the rights issue. Special provision for small There were no separate provisions dealing with delisting of companies small companies. Dispensation from certain provisions of the Delisting Regulations i.e. RBB Process, letter of offer, escrow account etc. 2 SEBI was not in the favour of delisting pursuant to rights issue in the matter of delisting of Uniproducts India Limited through, 3 Securities Appellate Tribunal had set aside SEBI s view which refused Uniproducts India Limited to delist pursuant to rights issue.
4 We believe that the Delisting Regulations has two major impediments which may deter companies from opting for the voluntary delisting: securing approval of public shareholders through postal ballot; and minimum number of shares to be acquired for delisting to be successful. Though obtaining approval through postal ballot is a welcome move, on a careful reading of the Delisting Regulations, it appears that the approval through postal ballot is a two staged process i.e. passing of a special resolution provided the same has been sanctioned by 2/3 rd of the public shareholders. The same has been illustrated by way of an example below: Company A has promoter shareholding of 60% and balance held by public. The resolution for delisting is successful provided 75% of the shareholders have approved the same, which can also include the promoters voting in favour of the resolution. Thus, if the Company secures 75% majority of the shareholders voting in favour of the said resolution than such resolution proposing delisting is said to be successful provided the 2/3 rd of the balance public shareholders (2/3 rd of 40%) i.e. 26.67% also vote in favour of the special resolution proposing delisting assuming all public shareholders participate in the postal ballot. Further, in order to delist successfully the promoter needs to acquire certain minimum number of shares [3] and the same is not dependent upon the minimum level of public shareholding applicable to the company as prescribed under clause 40A of the equity listing agreement. This is explained below by way of examples: Example 1: If promoter shareholding is @ 83%. The promoter will have to acquire at least 8.50% or more to delist the company. Example 2: Promoter shareholding is @ 77%. The promoter will have to acquire at least 13% or more to delist the company. This criterion is definitely a major hurdle to delisting as the same is completely dependent upon the participation of public shareholders in the RBB Process. If participation is low then even if the discovered price is at significant premium to the prevailing market price the delisting will fail on account of non-fulfillment of provision of the Delisting Regulations which imposes the requirement of minimum number of shares to be acquired in a delisting offer. It cannot be therefore ruled out that, the acquirer may come across a situation where it will have to offer a higher exit price even though the discovered price may be lower. The above clause does not encompass practical difficulties faced in reaching investors to participate in the delisting offer. We believe that historically average participation of shareholders in the RBB Process and tail period is low. However, the same cannot be confirmed due to non-availability of data. 4 3 Higher of (a) ninety percent of the total issued shares of that class excluding the shares which are held by a custodian and against which depository receipts have been issued overseas; or (b) the aggregate percentage of pre offer promoter shareholding (along with persons acting in concert with him) and fifty percent of the offer size.
5 Thus, important parameters which have not been taken into account while drafting the above clause are average participation of demat shareholders in RBB process and participation of physical shareholders in the tail period. Thus, from the perspective of Delisting Regulations clause 40A of equity listing agreement is not of much relevance. We believe that a careful analysis of such data would have helped in drafting the clause in much better way. Life after delisting Few of the advantages of delisting are lesser compliance, lesser service and operational cost especially if the company has a large investor base. However, practically even after the company has a large investor base. However, practically even after the company gets delisted the investor base may remain fairly large and such residual shareholders may not enable the company to reap the intended benefits and the purpose of delisting may get defeated. Whilst minority shareholders remain in a company there is a continuing obligation not to manage the company s affairs in a manner which is prejudicial or oppressive to them. While section 395 of the Indian Companies Act, 1956 (Act) is the only provision which deals with squeeze-out of minority shareholders that enables controlling shareholders, in certain circumstances, to compel minority shareholders to sell their shares. Some of the companies in past have opted for further capital restructuring exercise post delisting, such as capital reduction or scheme of arrangement under the provisions of section 100 of the Act, subject to approval of the High Court, so as to squeeze-out the minority shareholders. This has been challenged on several occasions by the minority shareholders. The Division Bench of Bombay High Court in Sandvik Asia Limited V. Bharat Kumar Padamsi and Others [5]observed that, once it is established that non-promoter shareholders are being paid fair value of their shares and that even the overwhelming majority of the non-promoters shareholders having voted in favour of the resolution, shows that the court will not be justified in withholding its sanction to the resolution. Conclusion Critics of delisting of shares argue the following: 1. Loss of good investment opportunities for the public; 2. Reduces wealth of the securities market; 3. Affects depth and liquidity of capital markets; and 4. Minority shareholders perceive that they are ultimately compelled to sell their shares because they run the risk of holding an illiquid investment. To conclude, SEBI in the Delisting Regulations has certainly shifted the balance in favour of investors and has tried to ensure that the depth of capital markets do not go down when the capital markets are sluggish. However, we are yet to witness the effectiveness of the provisions of the Delisting Regulations with so far (while this article was being written) only two voluntary delisting announced (and are at a stage prior to the acquirer issuing a public announcement ) post June 10, 2009. The issue and process of delisting may always remain complex and debatable until a balanced approach keeping in mind the interest of the acquirer/promoter, the target company and the shareholders is found. 5