"Sebi eases de-listing norms," was the theme of nearly every single media report after the board meeting of the securities market regulator held on November 19. Even before the board meeting, scores of reports had dotted the media about how at that meeting, Sebi would be making life simpler for transparent de-listing of shares from Indian stock exchanges.
The fine print is yet to be out. However, even while waiting for the fine print, the very first paragraph in Sebi's press release on the subject makes it clear that de-listing transactions have been made far more difficult - they have not been made easier. The paragraph says: "The de-listing shall be considered successful only when (A) the shareholding of the acquirer together with the shares tendered by public shareholders reaches 90 per cent of the total share capital of the company and (B) if at least 25 per cent of the number of public shareholders, holding shares in dematerialised mode as on the date of the board meeting which approves the de-listing proposal, tender in the reverse book building process."
The widening gap between approval of regulations by Sebi at a board meeting and the actual draft regulations being notified is worrisome. This practice demonstrates that the directors on the Sebi board, despite presiding over the governance of a regulatory body, consider the actual language of the regulations as too trivial to bother themselves with. It is evident that they approve regulatory prescriptions in abstract concept, although anyone involved with regulations anywhere in the world would know that the devil in regulatory frameworks lies in the detail. That is worthy of comment in a separate column altogether.
Coming back to the Sebi press release, not only has de-listing been made tougher, the new intervention in the regulations is a material deviation from well-established principles of Indian corporate law. The prescription that 25 per cent of the public shareholders in number have to tender their shares is seriously problematic in implementation. Worse, it is blatantly in contradiction with the colour sought to be given to the "reform" of the regulations i.e. of making things easier. Two other new conditions have been imposed. First, the number of shareholders should have tendered their shares in dematerialised form. Second, the number of shareholders should be reckoned on the date on which the board approves the de-listing.
It is well possible that a company can never delist simply because shareholders who held shares on the date the board approved may have sold their shares. Therefore, if there is a churn in the holdings of public shareholders, it is possible that more than 75 per cent of the shareholders who held shares on that date are no longer shareholders. In other words, the condition of at least 25 per cent shareholders in number as of a certain date should tender shares, could never be met.
The most serious problem with the new approach is that Indian securities law would deviate for the first time from the well-established norm of corporate democracy - of reckoning voting rights in terms of percentage of shareholding rather than in terms of number of shareholders. For example, when company law lays down the standard for a resolution to be passed, it prescribes counting the vote in terms of voting rights attached to the shares. It does not provide for attaching equal voting rights to all shareholders regardless of how many shares each one owns. Sebi's new approach or introducing the number of shareholders as a metric, would initiate new jurisprudence that is wholly unnecessary.
Such an approach could in fact incentivise fraud and impose enormous transaction costs on market players and serious administrative costs on Sebi to monitor compliance. When Sebi's stated objective is to combat fraudulent collusion between large public shareholders and the promoters when a company is being de-listed, it simply has to step up the game for enforcement. By changing the law, it is imposing an unwarranted burden on the market and on itself. Take the law on oppression and mismanagement under company law.
The law places a materiality threshold for eligibility to approach the enforcement machinery in terms of 10 per cent of the voting rights or a hundred shareholders in number. This is to enable a greater access to justice if there were widespread discomfort among shareholders regardless of number of shares held. However, this very provision is a source of enormous litigation. Often, just before initiating litigation, shares get transferred to multiple persons to meet the eligibility threshold of the larger number of aggrieved shareholders.
Weeks and months are then spent in intense litigation to determine the legitimacy of the very threshold to assert rights. Company managements typically allege that the transfers are a fraud only to meet eligibility norms. Shareholders argue that the literal meaning of the law should be adopted. In short, the new regulatory measure will nudge the securities market too towards adopting such bad practices, with the resultant litigation.
Sebi's shoulders are very broad and their muscles are highly empowered to act against fraudulent practices when it finds collusion between promoters and sections of public shareholders. Both the Sebi Act and the regulations prohibiting fraudulent and unfair trade practices give Sebi sweeping powers. It should use that muscle for enforcement if it finds abuse in the de-listing market. The propensity to legislate against every problem, real and perceived, makes life difficult for all, and worse, seeds further bad conduct.
The fine print is yet to be out. However, even while waiting for the fine print, the very first paragraph in Sebi's press release on the subject makes it clear that de-listing transactions have been made far more difficult - they have not been made easier. The paragraph says: "The de-listing shall be considered successful only when (A) the shareholding of the acquirer together with the shares tendered by public shareholders reaches 90 per cent of the total share capital of the company and (B) if at least 25 per cent of the number of public shareholders, holding shares in dematerialised mode as on the date of the board meeting which approves the de-listing proposal, tender in the reverse book building process."
The widening gap between approval of regulations by Sebi at a board meeting and the actual draft regulations being notified is worrisome. This practice demonstrates that the directors on the Sebi board, despite presiding over the governance of a regulatory body, consider the actual language of the regulations as too trivial to bother themselves with. It is evident that they approve regulatory prescriptions in abstract concept, although anyone involved with regulations anywhere in the world would know that the devil in regulatory frameworks lies in the detail. That is worthy of comment in a separate column altogether.
Coming back to the Sebi press release, not only has de-listing been made tougher, the new intervention in the regulations is a material deviation from well-established principles of Indian corporate law. The prescription that 25 per cent of the public shareholders in number have to tender their shares is seriously problematic in implementation. Worse, it is blatantly in contradiction with the colour sought to be given to the "reform" of the regulations i.e. of making things easier. Two other new conditions have been imposed. First, the number of shareholders should have tendered their shares in dematerialised form. Second, the number of shareholders should be reckoned on the date on which the board approves the de-listing.
It is well possible that a company can never delist simply because shareholders who held shares on the date the board approved may have sold their shares. Therefore, if there is a churn in the holdings of public shareholders, it is possible that more than 75 per cent of the shareholders who held shares on that date are no longer shareholders. In other words, the condition of at least 25 per cent shareholders in number as of a certain date should tender shares, could never be met.
The most serious problem with the new approach is that Indian securities law would deviate for the first time from the well-established norm of corporate democracy - of reckoning voting rights in terms of percentage of shareholding rather than in terms of number of shareholders. For example, when company law lays down the standard for a resolution to be passed, it prescribes counting the vote in terms of voting rights attached to the shares. It does not provide for attaching equal voting rights to all shareholders regardless of how many shares each one owns. Sebi's new approach or introducing the number of shareholders as a metric, would initiate new jurisprudence that is wholly unnecessary.
Such an approach could in fact incentivise fraud and impose enormous transaction costs on market players and serious administrative costs on Sebi to monitor compliance. When Sebi's stated objective is to combat fraudulent collusion between large public shareholders and the promoters when a company is being de-listed, it simply has to step up the game for enforcement. By changing the law, it is imposing an unwarranted burden on the market and on itself. Take the law on oppression and mismanagement under company law.
The law places a materiality threshold for eligibility to approach the enforcement machinery in terms of 10 per cent of the voting rights or a hundred shareholders in number. This is to enable a greater access to justice if there were widespread discomfort among shareholders regardless of number of shares held. However, this very provision is a source of enormous litigation. Often, just before initiating litigation, shares get transferred to multiple persons to meet the eligibility threshold of the larger number of aggrieved shareholders.
Weeks and months are then spent in intense litigation to determine the legitimacy of the very threshold to assert rights. Company managements typically allege that the transfers are a fraud only to meet eligibility norms. Shareholders argue that the literal meaning of the law should be adopted. In short, the new regulatory measure will nudge the securities market too towards adopting such bad practices, with the resultant litigation.
Sebi's shoulders are very broad and their muscles are highly empowered to act against fraudulent practices when it finds collusion between promoters and sections of public shareholders. Both the Sebi Act and the regulations prohibiting fraudulent and unfair trade practices give Sebi sweeping powers. It should use that muscle for enforcement if it finds abuse in the de-listing market. The propensity to legislate against every problem, real and perceived, makes life difficult for all, and worse, seeds further bad conduct.
The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own