Exit guidelines baffle promoters of compulsorily delisted firms

A spate of compulsory delistings have led to a peculiar problem. Promoters of such companies are required to offer shareholders an exit by buying delisted shares. 

However, there is no mechanism by which the promoters of compulsorily delisted firms can offer such exits, a matter which has been raised with the regulator, according to two sources familiar with the matter.

They face penal action, including freezing of their dividends and a bar on sale or pledging of shares in the absence of an exit.

A body of tax consultants and other professionals has written to stock market regulator, the Securities and Exchange Board of India (Sebi), to sort out the issue.

“When the promoters of the compulsory delisted companies express their intention…to provide the exit offer….there is no procedure provided for giving the exit…” said the letter dated August 4.Business Standard has reviewed a copy of the letter.  

Another source said that discussions have been held on the matter, though no formal procedure has been worked out yet.

Delisting can be voluntary or compulsory. Voluntary delisting essentially involves buying out public shareholders’ stake. A compulsory delisting is a penal measure. Authorities can remove companies from stock exchanges if they do not meet their obligations or listing requirements.

There has been a spate of delistings in recent times.

Stock exchanges have compulsorily delisted companies as recently as a month. Separate notices have been put out by both major exchanges (BSE and the National Stock Exchange) in August.

The regulator has put restrictions on the promoters of compulsorily delisted firms.

“The company, which has been compulsorily delisted, its whole-time  directors, promoters and the companies promoted by any such person, shall  not directly or indirectly access the securities markets for a period of 10 years from the date of compulsory delisting…” said the September 2016 circular on the matter.

The regulator has added some penal provisions to protect the interests of shareholders. Promoters’ dividends, rights, bonus shares and other benefits are frozen until they offer an exit. They are also not allowed to pledge or sell their shares, among other restrictions.

“The  promoters and  whole-time directors of the compulsorily delisted  company shall also not be eligible to become directors of any listed company till the exit option…is provided,” said the Sebi circular.  

All these restrictions can only be lifted after minority shareholders have received a suitable exit, based on a fair value of the shares. This in turn is determined by an independent exchange-appointed valuer.

“While Sebi and exchanges are looking to weed out companies which have remained non-compliant with securities laws for a considerable period of time, the process after declaration of compulsory delisting is unfortunately perplexing. It is unclear if Sebi or stock exchanges are to provide compliance certification and the manner of obtaining that, by promoters or the company,” said Sumit Agrawal, founder, RegStreet Law Advisors & an ex-official of Sebi. 

Pavan Kumar Vijay, founder and managing director at legal and financial consulting firm Corporate Professionals India said that the some companies had sought to use a stop-gap in the absence of a formal mechanism.

Confusions galore

• There is lack of regulation on compulsory delistings
• Promoters are required to offer an exit
• But there is no formal mechanism to offer an exit
• Meanwhile, exchanges have seen spate of compulsory delistings