Stepping forward with delisting reform

A reform proposed by the Sebi offers another chance for a transaction to succeed instead of having a guillotine kill a deal because the price is unacceptably high

The Securities and Exchange Board of India (Sebi) has decided to bring a new feature in the gaming process — an acquirer seeking to acquire shares to delist a company may make a counter offer to the public shareholders if he does not like the price discovered through India’s unique reverse book building process.  

While the devil is in the detail as to how the change would actually be provided for in the regulations that actually get drafted, the announcement that Sebi’s board meeting cleared the proposition is a welcome measure. The reverse book building process entails public shareholders quoting the price at which they would like to be bought out and express their willingness to be bought out at that price. The highest price payable to enable the acquirer to cross a shareholding threshold of 90 per cent is the “discovered” exit price.  This price ought to be paid to all shareholders so that their offer of shares held by them for purchase by the acquirer can be accepted and the 90 per cent threshold can be crossed. These are the two milestones that are necessary to be met to delist a listed company.

Now, usually this price leads to discovery of a King’s ransom — since the law creates a rent for shareholders holding a sizeable chunk among the minority shareholders. Very often the small shareholders are willing to sell out but a shareholder holding a chunk that would be vital to cross the 90 per cent mark holds the key to discovering the exit price. Many a suspicion about abusive collusion between acquirers and such substantial shareholders (among the minority) is expressed. Many a delisting exercise that would have led to small shareholders getting some value for their residual holdings get frustrated because a shareholder holding 1-2 per cent can hold the key to crossing the 90 per cent threshold and she could demand a fantastic price that frustrates the delisting offer.

With the reform measure proposed, if the exit price discovered is considered unreasonable, the acquirer would have another round of potential reasoning to say he would indeed be willing to pay a price but that price is lower than the exit price discovered. It is for the shareholders to accept or reject the counter offer. If they choose not to accept, the delisting would still fail (one has to see the fine print when the regulations actually come out). But if they choose to accept the counter offer, the delisting would go through. In the process of gaming each other, this new avenue at least gives another chance for the transaction to succeed instead of having a guillotine kill the deal because the price is unacceptably high.

While Sebi’s directors sitting on its “board” have approved the proposition, the actual amendments will eventually come out. The devil may be in the detail. One could argue that the reform measure is no big deal since the investors who are to be potential sellers could still trip the counter offer if they are not satisfied. Yet, it at least gives a round of negotiation, this time with the offer coming from the buyer — as opposed to the exit price being dictated purely by the potential sellers with a take-it-or-leave-it proposition.

One has to see how the provisions come out. They would govern the formulation of the counter offer, its offering to the public, the acceptance by the public, the threshold for such acceptance, and any scope, if any, if a counter to the counter offer were to possibly be a close common ground, and other such facets. One can never have statistics of failed delisting deals — since only closed deals can be counted while deal propositions that are so daunting that one refrains from even considering a delisting, would go undocumented.

A vibrant capital market system is one that is not insecure about exits by good companies — a policy stance that is fearful of losing companies exiting to private space would inexorably lead to good companies being insecure about entering the public space. The delisting regulations have singularly stood out as a hurdle to large acquisitions of listed companies, particularly in their interplay with the Takeover Regulations. Till date, the Sebi has not effected a clean-up to the interplay between these two bodies of law.  

If one can acquire a company in compliance with the takeover regulations and also meet the 90 per cent threshold and delist (thanks to such a vast majority liking the price), our listed M&A space would be a lot more active. Today, the takeover regulations, purport to reconcile the two regulations, but simply require the open offer under the takeover regulations to be suspended in order to attempt a delisting exercise, and then revert to the open offer under the takeover regulations if the delisting were to be unsuccessful. The counter offer proposition at least enables an offering of a different price but the procedural process reconciliation to ensure that there need not be two separate offers, await reform. Hopefully, the Sebi would take that up next — none of this would compromise investor interest. If at all, it would lead to the sovereign choice of the investor being capable of expression through a regulatory contract-forming framework.

The author is an advocate and independent counsel. Tweets @SomasekharS