Analysis of SEBI’s Consultation Paper on Review Voluntary Delisting Norms

[By Aryan Dama]

The author is a student of Maharashtra National Law University, Mumbai.

Introduction – The Process and The History

In August 2023, the Securities and Exchange Board of India (‘SEBI’) floated a consultation paper to review voluntary delisting norms under the SEBI (Delisting of Equity Shares) Regulations, 2021 (the ‘Regulations’). Under the Regulations, to delist a company, the acquirer must provide an exit opportunity to all public shareholders of the company at a price discovered using the reverse book building process (‘RBB’).

The RBB process begins with the calculation of a floor price in accordance with the Regulations. The acquirer can also provide an indicative price, which must be higher than the floor price. Second, public shareholders are required to tender their shares in favor of the acquirer through stock exchanges. If the shareholding of the acquirer does not cumulatively reach 90% (acquirer’s shareholding + shares tendered by the public shareholders in the acquirer’s favor), then the delisting is failed. Third, if the cumulative shareholding of the acquirer does reach 90% then a discovered price is determined based on eligible bids by the public shareholders. Fourth, the acquirer has the option to either accept (which would mean that the acquirer has agreed to buy the shares at the discovered price) or reject the discovered price. If the acquirer rejects the discovered price, then it can give a counteroffer at a price not less than the floor price. Fifth, the shareholders are allowed to tender their shares at the counter-offer price. If the post-counter-offer shareholding of the acquirer reaches 90%, then the delisting is successful.

India is the only country that follows the RBB process. The RBB process was adopted in 2003. It was felt that the exit price offered under the fixed-price process then did not justify company fundamentals and its true worth. Moreover, minority shareholders felt compelled to sell their shares at the offered exit price, even if it was not attractive enough, or else they held a potentially illiquid stock. Thus, the RBB process was adopted – to harmonize the interests of the acquirers and shareholders. However, the RBB process has been far from successful prompting SEBI to keep making amendments to the delisting regulations from time to time. The changes proposed in the consultation paper are the latest slew of changes proposed to the Regulations, hopeful of ensure a smooth delisting of companies.

Practical inefficiency of the RBB process

Year Name of Company Floor Price (₹) Discovered Price (₹) Premium Public Shareholding Comments
2023 Shreyas Shipping & Logistics Ltd. 375 (indicative) 870 138.35% 29.56% Discovered price rejected. Counter offer of ₹400.
  TTK Healthcare Ltd. 1,201.30 25.44% Insufficient tender by public shareholders.
  R Systems International Ltd. 262 47.4% Insufficient tender by public shareholders.
2022 Universus Photo Imagings Ltd. 567.43 1,500 164.34% 25.45% Discovered price rejected by acquirer.
  Jindal Photo Limited Ltd. 268.04 27.28% Insufficient tender by public shareholders.
  Xchanging Solutions Ltd. 39.23 25% Insufficient tender by public shareholders.
2021 Shyam Telecom Limited Ltd. 6.15 33.84% Insufficient tender by public shareholders.
  Brady and Morris Engineering Company Ltd. 61.04 750 1128.70% 26.25% Discovered price rejected by acquirer.
2020 Vedanta Ltd. 87.25 49.87% Insufficient tender by public shareholders.
  Hexaware Technologies Ltd. 264.97 475 79.27% 37.92% Successful but at high premium.

As evident, the two main causes of the failure of the RBB process are i) insufficient tender by public shareholders and ii) unrealistically high discovered price. Insufficient tender by public shareholders and high discovered price bring the delisting process to the end as the 90% threshold is not met or the discovered price is rejected by the board of directors of the respective company.  Thus, these two issues are the premise upon which SEBI has proposed the changes in the consultation paper. But before we move ahead to discuss the proposed changes, I think it is important to understand some inherent issues in the RBB process to truly appreciate the proposed changes.

Fundamental problems with the RBB Process

The RBB process is restricted to very limited participants – the public shareholders. Let us juxtapose the RBB process with the booking building (‘BB’) process used in an initial public offering. The BB process is open to the entire market, allowing for forces of demand and supply to operate freely. Since the sample size is so big, it results in a relatively fair price discovery. However, since the RBB process is open only to the public shareholders of the delisting company, the forces of demand and supply are not able to operate freely. Since the sample size is small, the determination of the discovered price is prone to manipulation by shareholders. Thus, the RBB process fails.

Further, the exit price should be suggestive of the price the buyer is willing to pay. In the RBB process, the only reference points for the shareholders are the floor price and/or the indicative price. It is important to understand that neither of these prices is an actual representation of the price the acquirer is willing to pay for the strategic value of the company. This was also acknowledged by SEBI in the form that delisting without the knowledge of what the acquirer is willing to pay leads to a lot of speculation. This lack of information is a double-edged sword as it creates a scenario where the shareholders can either squeeze out the maximum price from the acquirer based on the idea that the acquirer might be willing to pay more, or it results in exploitative amounts of premium being sought. The uncertainty also causes the public shareholders to not tender their shares at all.

These fundamental conceptual issues related to the RBB process along with the practical efficiency of the RBB proves as understood in the case studies prompted  SEBI to propose the changes in the voluntary delisting norms through the consultation paper.

Solutions Proposed in the Consultation Paper

As a part of the solutions, SEBI has proposed to change the counter-offer framework, provide alternatives to the RBB process, and review the floor price calculation process.

a) Change to the counter-offer framework:

Under the current framework, the acquirer is only able to make a counter-offer upon reaching 90% post-offer shareholding. However, even if the 90% threshold is not reached, the majority of the public shareholders are willing to delist. In such a case under the current counter-offer framework, the acquirer is not able to provide a counter-offer to the public shareholders to reach the 90% post-offer shareholding threshold and the delisting fails. Under the proposed changes, the acquirer will have the ability to make a counter-offer to reach the 90% threshold if the bids received are higher of:

a) the difference between the acquirer’s shareholding and 75% of the total issued shares of the company; and

b) 50% of the public shareholding.

b) Alternative to the RBB process:

SEBI has also proposed to provide an option to delist equity shares at a fixed price instead of the RBB process, subject to the following conditions:

a) the option is available only to those companies whose shares are frequently traded shares as defined under the Takeover Code;

b) the fixed price offered will not be lower than the floor price; and

c) the delisting offer shall be successful if the post-offer shareholding of the acquirer along with the shares tendered by the public shareholders, at the price offered by the acquirer, reaches 90% of the total issued shares of the company.

Personal Analysis

According to me, the abovementioned changes proposed by SEBI directly target the flaws of the RBB process:

a) insufficient tender by public shareholders

Three reasons lead to public shareholders not tendering sufficient shares:

i) the floor/ indicative prices are not reflective of what the acquirer is willing to agree to. Arguendo, even if the floor/ indicative prices are a fair reflection, they are underwhelming to the public shareholders;

ii) there is complete uncertainty as to what the discovered price will be; and

iii) as a consequence of i) and ii) the shareholders are effectively expected to tender their shares without knowing the price that they will receive.

The change to the counteroffer process will allow the acquirer to respond to the discovered price even if the 90% post-offer shareholding threshold is not met. The counter-offer has the potential to attract more public shareholders to tender since they will be getting a higher price. The fixed price process ensures that the price comes from the acquirer (buyer) and not from the public shareholders (seller) Such a setup provides public shareholders with a prior understanding of the price expected by the acquirer and removes the uncertainty regarding the discovered price.

b) discovered price rejected by the acquirer

The reason that discovered prices are rejected by acquirers is that the price discovered under the RBB process requires a huge premium on the floor price. The acquirers are generally unwilling to agree to enormous premiums for the lack of economic viability.

The fixed price process eliminates the negotiation aspect of the RBB process, where the floor/indicative prices are provided and then the discovered price is found and then there is a counteroffer. In such a situation, each party tries to exploit the best price out of the other. The fixed price process places a burden on the acquirer to provide an exit price that the public shareholders find to be acceptable. The shareholders only have the option of accepting or rejecting the provided fixed price. This removes the speculation that the acquirer can be bullied into accepting a higher price. Thus, the fixed price process requires the acquirer and the public shareholders to be mutually fair and reasonable.

These proposed changes are especially important considering the trend of failed delistings. Companies had to opt for alternative means to increase the chances of a successful delisting. For example, after the delisting proposal of Vedanta failed, the promotor, Anil Agarwal, sought to delist through an open offer. Similarly, after Blackstone’s delisting proposal for R Systems International Ltd. failed, it launched an open offer to acquire more stake.

Conclusion

The issues with the RBB process can broadly be understood as a polar disconnect between the acquirer and the public shareholders. Both parties are on opposite ends of the spectrum. The proposed changes when read considering the issues they hope to tackle, create a bridge between the parties. They provide a common ground of understanding in terms of at what price either of the parties would be willing to delist. Thus, this seems to be a delisting process where the interests of both parties are protected instead of just one.

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