SEBI Board Eases Delisting Norms, Strengthens Related-Party Transaction Provisions

The Securities and Exchange Board of India's board decided to make it easier for acquirers to delist after an acquisition-led open offer, expanded the definition of related party and related-party transactions and relaxed provisions applying to superior voting rights shares.

According to a media statement issued after the meeting on Tuesday, the regulator's board has also decided to:

• Propose a framework for Gold Exchange and SEBI Vault Managers Regulations, 2021.

• Approve the creation of the Social Stock Exchange for fundraising by social enterprises.

• Frame an investor charter, including a mission statement, rights and responsibilities, and dos and don'ts for investors in the securities market.

• Permit non-individual resident Indians to become constituents of foreign portfolio investors that are registered in alternative investment funds set up in international financial services centres.

• Amend criteria for determining 'fit and proper' in the Intermediaries Regulations, 2008.

• Include cost accountants for share reconciliation audit under SEBI (D&P) Regulations, 2019.

Amendments To Facilitate Post-Takeover Delisting

Current regulations require an acquirer that exceeds 75% or 90% thresholds of public shareholding, via shares tendered in the mandatory open offer, to first meet the required threshold and then delist.

The SEBI board has decided to amend the existing regulations to allow acquirers an easier route to delist or reduce stake below 75% within two years.

Here's how it will work for acquirers making an open offer under the takeover regulations:

If the acquirer wants to delist the target company, it must propose a higher price—a premium over the open offer price.

If the response to the open offer takes the acquirer's shareholding in the target to delisting threshold of 90%, all shareholders who tender their shares will be paid the delisting price.

If the 90% threshold is not met via the open offer, then all shareholders who tender their shares shall be paid the same takeover price.

If the target company does not get delisted but the acquirer crosses 75% threshold, the acquirer will have a 12-month period to attempt delisting under reverse book-building method. If the delisting does not occur in that one year, the acquirer will have another 12 months to meet the minimum public shareholding norm.

If at the time of the acquisition the acquirer states the target will remain listed, but crosses 75% threshold after an open offer, then the acquirer can proportionately scale down its purchases made via takeover deal and open offer such that 75% is not crossed. Or the acquirer can comply with the minimum public shareholding norm within the time stipulated under the Securities Contract Regulations.

SEBI Tightens Some Screws On Related-Party Transactions

The SEBI board has approved expanding the definition of a related party to:

• All persons/entities in a promoter group (irrespective of shareholding).

• Any person/entity holding directly or indirectly a 20% stake in the listed entity in the immediately preceding year. This falls to 10% or more with effect from April 1, 2023.

It has also approved expanding the definition of related-party transactions to include transactions between:

• The listed entity/its subsidiaries and a related party of the listed entity/its subsidiaries.

• The listed entity/its subsidiaries and any person/entity, the purpose and effect of which is to benefit a related party of the listed entity/its subsidiaries.

Material RPTs will need the prior approval of shareholders of the listed entity if they cross Rs 1,000 crore or 10% of the consolidated annual turnover, whichever is lower. This change expands the scope of shareholder approval which earlier was needed only for transactions exceeding 10% of annual consolidated turnover.

The approved amendments also expand the scope of the audit committee approval. For instance, RPTs exceeding a certain size threshold, where the subsidiary is a party but the listed entity is not, will require the approval of the listed entity's audit committee.

Disclosures of RPTs have been made more frequent.

Enhanced disclosures to be placed before the audit committee, provided in the notice to shareholders for material RPTs, and provided to the stock exchanges every six months. Currently, this is an annual requirement.

The RPT amendments come into force from April 1, 2022.

Superior Voting Rights Shares—Threshold Raised

Existing provisions require that a superior rights shareholder should not be part of a promoter group that has a net worth of more than Rs 500 crore. That threshold has now been raised to Rs 1,000 crore, ostensibly keeping in mind the scale of India's young companies.

Also, the minimum gap between issuance of superior rights and filing of the red herring prospectus has been reduced to three months from the existing requirement of six months.