Improving market efficiency

Sebi's decisions are in the right direction

Market regulator Securities and Exchange Board of India (Sebi) took some important decisions at its board meeting on Tuesday. It tightened the regulations governing related-party trades and clarified the situation with regard to contradictory regulations in the takeover code.  The Sebi board also laid down the basic guidelines for launching electronic gold trading on exchanges, cleared the way for the offering of silver exchange-traded funds and issued guidelines on setting up a social exchange segment to allow non-profits and for-profits in the social space to raise funds. These open alternative investment avenues. 

The regulator pointed out existing norms for related-party trades had loopholes, which could be used to siphon off funds, for instance. The definition of related-party was amended to include all entities that were part of the promoter group, irrespective of their shareholdings. Indeed, with effect from April 1, 2023, any entity that holds, directly or indirectly, over 20 per cent stake in the preceding fiscal, or 10 per cent or more at the time of a trade, will be considered a related-party. Related-party transactions will include any trade between a “listed entity or any of its subsidiaries on the one hand, and a related party of the listed entity or any of its subsidiaries on the other hand.” Some transactions will require the prior approval of shareholders. These alterations should help protect the interests of minority shareholders. 
 

Another set of key changes, which have high relevance to mergers and acquisitions activity, and to the disinvestment process in particular, has been made in the delisting framework. An acquirer making an open offer will be allowed to simultaneously launch a delisting bid. Currently, any entity seeking to take control of a listed company must make an open offer to buy a 26 per cent stake from the public. If this is fully subscribed, it may take the acquirer’s stake above 75 per cent. But according to the rules relating to closely held companies, the acquirer must not hold more than 75 per cent stake before making a delisting bid. And, to successfully complete a delisting, the acquirer must hold over 90 per cent stake.  In practice, this creates complications. An acquirer may need to make an open offer and buy shares, and then sell shares, to get below the 75 per cent threshold, and subsequently it must again buy shares to reach the 90 per cent mark. By allowing simultaneous delisting bids and open offers, delisting has been made much simpler. Apart from market frictions caused by repeated trades, price discovery can be better than with the reverse book building required to delist. 

Any such simultaneous open offer and delisting bid must occur with full disclosure. The acquirer must state the intention to delist upfront when making the open offer. A higher price must be offered for delisting. If the delisting threshold of 90 per cent is hit, all shareholders must be given the delisting price, while if the 90 per cent threshold is not hit, all shares must be bought at the open offer price.  Apart from this, the rules for issuance of superior voting rights have been relaxed. This will allow the founders of technology start-ups to raise funding without losing control. This mode of issuance has been used successfully in cases like Facebook and Uber. Taken together, all these regulatory changes should increase market efficiency.