Delisting before open offer: SEBI’s missed opportunity?

By Ganesh Prasad and Sanjay Khan, Khaitan & Co
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The Securities and Exchange Board of India (SEBI) has recently notified crucial amendments to the SEBI (Delisting of Equity Shares) Regulations, 2009 (Delisting Regulations), and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations). These amendments were followed up with a circular permitting on-market settlement of buyback, delisting and open offers.

The above changes are aimed at easing the process of acquisition of listed companies by permitting an acquirer to make a delisting offer prior to completion of the mandatory open offer (in situations where the acquisition triggers the requirement to make an open offer).

Backdrop

By way of background, in terms of the Takeover Regulations, if an acquirer’s shareholding in the target company (taken together with the shareholding of persons acting in concert with the acquirer) exceeds the maximum permissible non-public shareholding (i.e. 75%) pursuant to an open offer, the acquirer is required to bring down its shareholding below the prescribed level within one year, and is prohibited from making a delisting offer during the one-year period.

Ganesh Prasad
Ganesh Prasad

This requirement posed concerns for financial investors aiming to acquire listed companies, as such investors prefer to delist the target company immediately after the acquisition, so that they can: (a) exercise better control over the target company (i.e. with less public scrutiny and a lower public shareholding); and (b) steer the target company in line with their aggressive growth strategies (which may require stern and often unpopular measures). The above requirement, therefore, kept many a financial investor at bay.

Attempted resolution

The amendments to the Delisting Regulations and the Takeover Regulations have attempted to resolve this issue by providing acquirers with an option to make a delisting offer before proceeding with the mandatory open offer. Prima facie, this seems to have resolved the issue (and credit must be given to SEBI for this attempt). However, a careful analysis of the process gives rise to certain concerns that may not make this option lucrative.

Sanjay Khan
Sanjay Khan

For instance, in the case of a delisting offer made pursuant to an open offer, the open offer price becomes the floor price for the delisting offer. This, coupled with the fact that on failure of the delisting offer, the open offer price stands revised with a 10% annual interest (owing to delay in the open offer), will lead to the delisting offer price (which is determined pursuant to the reverse booking building process) being substantially higher than the open offer price.

In most cases, this will not be commercially viable for the acquirer, and will only end up delaying the open offer process. On a related note, however, a welcome change in the Delisting Regulations is the introduction of a “true” reverse book building process for discovering the delisting offer price, which is now the price at which the acquirer would cross the threshold of 90%.

Further, the acquirer is required to open an escrow account before making the detailed public statement for the open offer, and open another escrow account before proceeding with the delisting offer. It is not clear whether the open offer escrow account can be topped up and used by the acquirer for the delisting offer as well, and used for the open offer in case of failure of the delisting offer.

A possible solution to the concerns highlighted above could be permitting the delisting and open offer to run simultaneously. The acquirer could make a common public announcement for both the offers (with a common escrow account), giving the public shareholders an option to tender their shares under the open offer (at the open offer price) or submit their bids under the delisting offer (at prices of their choice), during a common tendering/bidding period (which can be implemented in terms of the above-mentioned circular).

If the resultant delisting offer price was acceptable to the acquirer, it could proceed with the delisting offer, or else continue with the open offer purchases. Achieving this would require developing the infrastructure needed to run two simultaneous offers, notifying ancillary changes to the regulations, and tackling issues that may emerge while finalizing the process. However, once implemented, it would surely make the option to delist on substantial acquisition of shares much more attractive to financial investors.

Overall, SEBI’s move to provide a delisting option before completion of an open offer is encouraging. However, with some additional effort, this option could be made even more lucrative (for both the acquirer and the public shareholders). While one open offer coupled with a delisting offer in terms of the amended regulations has already been announced, the above suggestion of running the delisting and open offer simultaneously, if implemented, could certainly boost acquisitions of listed companies. If, however, the regulations are left in the current form, it might be a missed opportunity for the market regulator.

Ganesh Prasad is a partner and Sanjay Khan is an associate at Khaitan & Co. The views of the authors are personal, and should not be considered as those of the firm.

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