Sebi agrees to ease delisting rules

Sets up internal panel to iron out issues companies face with delisting regulations

Almost a year back, when Arvind Jolly decided to take his company Jolly Board private, its stock price was quoted around Rs 300 apiece. After discussions with investment bankers, it was concluded that India’s leading fibre-board maker might have to shell out a maximum of Rs 600 per share to public shareholders, who owned 10 per cent in the company, to ensure that the delisting bid was successful. After protracted negotiations, Jolly Board ended up paying Rs 1,000 a share to public shareholders under the reverse book building (RBB) process used for delisting.

Mumbai-based Jolly Board is not the only company which, in recent times, has been forced to pay through the nose to go private. In the past, several companies, intending to delist from bourses, have either had to give in to the exorbitant demands of shareholders or shelve their plans to go private, leading to protests by industry bodies and corporations.

What is reverse book building?

• It is a price discovery mechanism used during voluntary delisting of shares
• Under this, shareholders can bid at various prices above or equal to the floor price
• Bids are accepted and matched by the exchange till the time the offer is open
• The price at which most bids are received becomes discovered price
• Company has to buy back shares from public at the discovered price
• Either 50% of public shareholding or 90% promoter holding (whichever is higher) has to be achieved to ensure delisting is successful

After years of lobbying to relax the delisting norms, the Securities and Exchange Board of India (Sebi) has finally given in to the demand. The market regulator has set up an internal panel to iron out issues faced by companies with the delisting process. The committee has started work.

According to people with direct knowledge of the development, the regulator is planning to examine the entire delisting framework, including the quantum of shares required to be purchased, the price discovery and realignment of rules with clauses in the new Companies Act. Companies find it difficult to delist as traders or operators take positions on the stock soon after a delisting announcement, artificially pushing up prices and dictating terms for delisting, say promoters and bankers.  

“The challenge with delisting is that a group of shareholders gets together can decide the price. Also, the quantum required to be purchased is a problem. As shares tendered in delisting attract capital gains tax, it  deters many shareholders from participating,” says Jolly, managing director, Jolly Board, which delisted recently.

Sebi need not dilute the delisting requirements as it doesn't want to be seen as a facilitator for companies to exit but should try to strike a balance between the expectations of shareholders and the exiting company, say law firms. “There needs to be an equilibrium with the seller on one side and the acquirer on the other. If a few shareholders get together before the bidding, they can dictate the price. If the exit price is too high and the delisting doesn't go through, it deprives genuine shareholders of an opportunity to exit,” says Sudhir Bassi, executive director at leading law firm Khaitan & Co.

Besides structural issues with delisting, there are certain lacunae in the delisting regulations, which Sebi could try and iron out, say some lawyers. “Under the new Companies Act, 2013, it is provided that when a listed company is merged with an unlisted company, the unlisted company can remain unlisted. Therefore, this clarity should also be provided in the delisting guidelines,” says Lalit Kumar, partner, J Sagar Associates. Experts say Sebi should also address certain concerns surrounding possible clashes between delisting regulations with other regulations such as those on buybacks or the takeover code.

For instance, as per the takeover code if the shareholding in the company post an open offer goes beyond 75 per cent, it cannot immediately make an delisting offer and has to observe a 12-month cooling off period. Similarly, delisting bid isn't permitted following a buy-back offer. Some experts believe besides RBB, Sebi should allow other routes for delisting such as independent valuation or fixed price band book building.