Just when the going was great for promoter shareholders wanting to delist shares of companies from the recognized stock exchanges, SEBI has notified new regulations for delisting of equity shares of listed companies with effect from June 10, 2009. These regulations replace the SEBI (Delisting of Securities) Guidelines, 2003, as far as delisting of equity shares are concerned. It, however, appears that the 2003 guidelines continue to apply to delisting of other listed securities which are not equity shares as the new Regulations are limited only to equity shares and not all securities.
The notification of full-fledged regulations in the place of general guidelines for delisting of equity shares is a welcome change. The regulations whilst retaining the basic framework of the guidelines have provided more clarity on the procedures involved in delisting of equity shares. At the same time they have also introduced more stringent requirements for voluntary delisting of equity shares making it that much more difficult for promoters to delist entities controlled by them.
It is debatable if a voluntary delisting offer can be made by a person other than the promoter of a listed company. Unlike the guidelines which loosely use the term ‘acquirer’, to indicate that any person can make such an offer, the regulations seem to suggest that a voluntary offer can only be made by a promoter to the public shareholders of the company. If a company has more than one promoter, it appears that the exit opportunity will be available only to the public shareholders to the exclusion of the other promoters of the company.
An important change introduced by the regulations pertains to the promoter shareholding threshold for the delisting to be successful. Earlier, the public shareholding had to fall below the required minimum i.e. 25% or 10%, as the case may be, in order for a delisting offer to be successful. Under the current regulations, for a delisting offer to be successful the promoter shareholding has to reach either 90% of the issued share capital excluding the shares held by a custodian pursuant to issue of depository receipts or the aggregate percentage of the pre-offer promoter shareholding and 50% of the offer size, whichever is higher. By delinking the minimum public shareholding requirement from the delisting threshold, the current regulations have made it more difficult for promoters of companies, especially those with minimum 25% public shareholding, to delist the equity shares from the exchanges.
The current regulations also require that the delisting offer be pre-approved by the shareholders of the target company by way of a two thirds majority such that the votes cast by public shareholders in favour of the resolution should be at least two times the number of votes cast against the resolution. It appears that the intention is to treat the public shareholders as a separate class of shareholders thereby requiring them to approve the delisting offer by two thirds majority. The concept of interested shareholder does not exist under Indian law. By treating the promoter shareholders as a separate class the regulations seem to suggest that the promoters are ‘interested’ in the resolution and therefore a mere special resolution will not be sufficient for approving the delisting offer. Given the fact that the thresholds have been increased to 90% or more and the delisting price is determined solely by the public shareholders, the requirement of two thirds majority consent of the public shareholders seems rather onerous.
As per the regulations, holders of equity shares in physical form may also participate in the reverse book building process and be included towards computation of the delisting threshold to determine success or failure of the delisting offer.
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The regulations have also changed the reference date for the floor price of the offer to be the date on which stock exchanges are notified of the board meeting of the target company as opposed to the date of the public announcement. This is a welcome change given that under the earlier guidelines due to the time gap between the board meeting and the public announcement, high speculation used to drive trading of the target company shares thereby unduly increasing the floor price.
The escrow mechanism and movement of funds into and from the escrow and special accounts have been clarified in the regulations. Clear timelines have been stipulated for the offer process including the maximum time gap permissible between public announcement and opening of the delisting offer. Whilst the stock exchanges are required to process applications for in-principle approval within a period of thirty days, no specific timeline has been laid down for grant of final delisting approval.
Under the guidelines, it was debatable whether the promoters of a company which is not in compliance with the minimum public shareholding requirement can proceed with a delisting offer. Some companies were infact required to first comply with the minimum public shareholding requirement before approving a delisting offer as the listing agreement does not permit further dilution of public shareholding. The regulations provide that if the public shareholding at the opening of the bidding period is less than the minimum public shareholding required under the listing agreement, the promoter shall ensure that the public shareholding is brought up to such minimum level within a period of six months from the date of closure of the bidding through any of the ways mentioned therein. It appears that a delisting offer in respect of a company that is not in compliance with the minimum public shareholding requirement under Clause 40A of the listing agreement is permissible under the Regulations. However, the methods by which a promoter could bring the public shareholding back to the required minimum are limited to a fresh issue of shares, offer for sale and divestment of promoter stake. One would assume that other methods such as a preferential allotment to a public shareholder and the like should also be available to the company in order to increase its public shareholding to the required minimum.
An issue faced by promoters who have successfully delisted the equity shares of companies is the continued presence of public shareholders who have not participated in the delisting offer including the tail offer period post delisting. Under existing Indian laws, there is no mechanism for compulsory squeeze out of minorities at a fair price. The recently notified regulations, being an attempt to streamline the delisting process, should have also addressed this issue in a manner that safeguards the interests of the minority investors as well as the controlling promoter shareholders of the delisted entity.
The regulations are by and large a step in right direction. Given the slew of successful delisting offers in the recent past, it is to be seen if promoters are willing to brave the higher thresholds prescribed by the current regulations in order to get their companies delisted.
The author is Partner, Amarchand & Mangaldas & Suresh A. Shroff and Co.