SEBI’s New Delisting Rules Don’t Address The Elephant In The Room, Experts Say
The SEBI logo in Mumbai. (Photograph: BloombergQuint)

SEBI’s New Delisting Rules Don’t Address The Elephant In The Room, Experts Say

Market regulator SEBI has notified several changes to its delisting regulations this week. The biggest pain point for promoters — the price discovery process, however, has not seen any change.

The regulator has been reluctant to tinker with the reverse book-building process – so the new rules, while helpful, do little to make delistings easier on the price discovery aspect, Vikram Raghani, partner at JSA, told BloombergQuint.

Reverse book-building mechanism is used to determine the price of shares while delisting a company. Public shareholders make bids at a price at which they are willing to sell their shares. The offer price is then determined after aggregating all shareholder bids.

The revised regulations address many concerns except the most crucial one, Manshoor Nazki, partner at IndusLaw, said. The big fix to the delisting framework that the industry wants hasn’t been done, Nazki said.

The main reason why delistings fail is because the price discovery is one-sided i.e. by shareholders. The disconnect between what promoters are willing to offer and what shareholders expect is likely to continue. That’s one gap the regulator has been unable to bridge.
Manshoor Nazki, Partner, IndusLaw

The changes to the delisting framework were approved by SEBI in its March board meeting. The detailed regulations have now been notified by the regulator.

The key changes include:

Indicative Price By Promoters

The delisting process typically kicks off with the acquirer, usually the promoter, writing to the board to take the company private. As per the new rules, the acquirer will now need to make an initial public announcement via the stock exchanges first.

The announcement will need to include an indicative price — the price offered by the acquirer which is higher than the floor price. So far, promoters would indicate to the board the price they’re willing to offer. The regulator has now made it a statutory requirement.

The indicative prices, the rules said, can be revised upwards before the bidding period for the shareholders starts. If the price discovered via the reverse book-building process is lower than the indicative price, the latter will prevail for delisting purposes.

“In reality, book-building price tends to be much higher than indicative price. So far, promoters have used it to only manage shareholder expectations,” Raghani said.

Getting IDs In The Mix

Delisting offers epitomise the conflicts between the interests of the promoters and the minority shareholders, Umakanth Varottil, associate professor of law at the National University of Singapore, had said in an column for BloombergQuint last year. He had pointed out that unlike SEBI’s regulations governing takeovers, there is no regulatory requirement either for the board to constitute a committee of independent directors or for the directors to make recommendations to the shareholders as to the delisting offer.

“This arguably makes the role of the independent directors in a delisting rather inchoate and limits the ability of minority shareholders to hold directors—both independent and otherwise—accountable for their actions and omissions,” Varotiil had said.

The regulator has now fixed this gap.

Company boards will now be required to set up a committee of independent directors who will have to give reasoned recommendations on the delisting proposal. The voting pattern of independent directors will also need to be disclosed to public.

Tighter Timelines

The other useful change pertains to clarification of timelines for various steps during the delisting process.

So far, the rules prohibited delisting post a buyback or preferential allotment by a company but didn’t prescribe any timelines for it. The revised rules have now specified a time period of six months in both cases.

Also, the board approval for delisting must be obtained within 21 days of the initial public announcement.

Finally, the regulator has also made delisting easier for certain companies.

Delisting of listed subsidiaries will now be exempted from the reverse book-building requirement if it becomes a wholly-owned subsidiary of its listed parent under a scheme of arrangement. The parent and the subsidiary will need to be in the same line of business for this exemption to apply.

The resolution will need shareholder approval. Votes cast by public shareholders of the listed subsidiary in favour of the proposal should be at least two times the number of votes cast against it. Also, the majority of public shareholders of the listed parent will need to approve the proposal.

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