Just when things were looking good for promoter shareholders wanting to delist company equity shares, the Securities and Exchange Board of India (SEBI) notified new regulations for doing so. These took effect from 10 June and replace the SEBI (Delisting of Securities) Guidelines, 2003, in relation to the delisting of equity shares. Other listed securities are still covered by the 2003 guidelines.
The establishment of full regulations for delisting of equity shares is welcome. The regulations retain the basic framework of the guidelines yet clarify the procedure for delisting equity shares. They also introduce more stringent requirements for voluntary delisting of equity shares, making it much more difficult for promoters to delist entities they control.
Whether a voluntary delisting offer can be made by a person other than the promoter of a listed company is debatable. Unlike the guidelines, in which the loose term “acquirer” indicated that any person could make such an offer, the regulations suggest that a voluntary offer may only be made by a promoter to the public shareholders of the company. Where a company has more than one promoter, it appears that the exit opportunity will be available only to the public shareholders, to the exclusion of the other promoters.
An important change introduced by the regulations surrounds the promoter shareholding threshold for successful delisting. Previously, the public shareholding had to fall below a required minimum – either 10% or 25%, depending on the requirements stipulated in clause 40A of the equity listing agreement – in order for a delisting offer to be successful. Now, the promoter shareholding has to reach either 90% of the issued share capital (excluding shares held by a custodian pursuant to the issue of depository receipts), or the aggregate percentage of the pre-offer promoter shareholding and 50% of the offer size, whichever is higher. By delinking the minimum public shareholding requirement from the delisting threshold, the regulations have made it harder for promoters of companies, especially those with minimum 25% public shareholding, to delist shares.
The regulations also require the delisting offer to be pre-approved by a two-thirds majority of the target company’s shareholders. The promoter shareholders are treated as a separate, “interested” class in the context of equity shares of equal standing, meaning that a mere special resolution is insufficient for approval of the delisting offer. Given that the delisting threshold has increased to 90% or more and that the delisting price is determined solely by public shareholders, the requirement of a two-thirds majority consent by public shareholders is onerous.
The regulations have also changed the reference date for the floor price of the offer: it is the date on which stock exchanges are notified of the target company’s board meeting, rather than the date of the public announcement. This is a welcome change; under the guidelines, the time gap between the board meeting and the public announcement allowed speculators and day traders to drive up trade of the target company’s shares and unduly increase the floor price. The regulations clarify the escrow mechanism and movement of funds into and from the escrow and special accounts. They also stipulate timelines for the offer process, including the maximum interval between public announcement and opening of the delisting offer. While the stock exchanges are required to process applications for in-principle approval within 30 days, no timeline has been laid down for the grant of final delisting approval.
Under the guidelines, it was debatable whether the promoters of a company not in compliance with the minimum public shareholding requirement could proceed with a delisting offer. Some companies were required to comply with the minimum public shareholding requirement before stock exchanges approved a delisting offer.
The regulations state that if the public shareholding at the opening of the bidding period is less than that required under the equity listing agreement, the promoter should ensure that it is brought up to the minimum level within six months from the close of bidding. The regulations permit a delisting offer to be undertaken in respect of a company not in compliance with the minimum public shareholding requirement under clause 40A of the equity listing agreement. However, the methods by which a promoter may bring the public shareholding back to the required minimum are limited to the fresh issue of shares, an offer for sale or divestment of promoter stake. A preferential allotment to a public shareholder and the like (who must not be a promoter or person acting in concert) will also be available to the company in order to increase its public shareholding to the required minimum.
The continued presence of public shareholders who have not participated in the delisting offer presents a problem for promoters who have successfully delisted the equity shares of companies. Under existing securities or company law there is no statutory mechanism for a compulsory squeeze-out of minority shareholders at a fair price. In order to streamline the delisting process, this issue should be addressed to safeguard the interests of both minority investors and controlling promoter shareholders. Overall the regulations are a step in the right direction. Whether promoters are willing to brave the higher thresholds prescribed in order to delist their companies remains to be seen.
Akila Agrawal is a partner at Amarchand & Mangaldas & Suresh A Shroff & Co.
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