The Securities and Exchange Board of India (SEBI) has notified the new SEBI (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”). In a nutshell, delisting of shares from stock exchanges has never been tougher.
A number of lacunae in the old SEBI (Delisting of Securities) Guidelines (“Delisting Guidelines”) have been fixed, but the regulator has clearly sent a signal that delisting of securities may occur only in the rarest of rare cases. One specific downside is the seeming introduction of discretion in the hands of stock exchanges to “approve” delisting, but that may warrant a separate column altogether.
India has one of the strongest anti-delisting regimes in the world. Shareholders other than the one seeking to cause the voluntary delisting are required to be given an exit opportunity at a price to be quoted by them.
The price at which the maximum shares are tendered for purchase by the acquirer is the offer price at which the shareholders may be bought. The new Delisting Regulations have tightened the screws further on this strict regime.
Three key measures have been taken. First, a new hurdle has been laid down in terms of the special resolution required to be passed by postal ballot before commencing any delisting.
The votes cast in favour of the delisting proposal by public shareholders (non-promoter shareholders) ought to be at least twice the votes cast by public shareholders against the proposal. This is a new qualitative threshold concept introduced into Indian securities regulations. In simple terms, a majority of public shareholders who choose to vote on the postal ballot ought to support delisting – most unlikely by any reasonable stretch of imagination.
Second, the special resolution passed by the listed company has been given a limited currency, with a new procedural dispensation. An ‘in-principle’ approval of the stock exchanges has to be sought at the outset, after which the compliance requirements of price discovery and acceptance of the final offer price have to be met.
Thereafter, the final approval of the stock exchange has to be sought. However, such final approval has to be sought within a period of one year from the date of the special resolution. In other words, once the special resolution is passed, the delisting effort would have to be completed within one year, failing which another resolution with the exacting voting standard would be required. Resolutions passed before June 10, 2009 (the date on which the new Delisting Regulations came into effect) will have a further residual life of six months.
Third, but most importantly, for a delisting offer to be successful, regardless of the level of public shareholding applicable to the company under the listing agreement, the delisting offer ought to result in the shareholding of the promoter increasing to 90 per cent, or by at least half of the delisting offer size, whichever is higher.
In other words, it would no longer be possible to acquire just one share in compliance with the Delis-ting Guidelines when the acquirer already holds over 90 per cent shares.
Such acquirers would have to buy at least half the size offered to be bought – of course, there is no bar on making an offer for a size of say, one share, or say, a hundred shares, but that would be provocative, and in the Indian market, anything provocative struggles to pass muster regardless of how technically compliant it may be.
There are other factors too that are new. The offer period for which sharehol-ders may quote the price at which they would like to be bought out is also now regulated. The offer period ought to remain open for at least three days but not more than five days. This is a rather short timeframe to get shareholders to participate in the delisting offer.
The factors set out in the Delisting Regulations for a stock exchange to take into account in using its power to “approve” the delisting, are illustrative factors such as investor grieva-nces, compliance with lis-ting conditions, listing fees and other facts that stock exchanges “deem fit to verify”.
Stock exchanges are known to have been involved in litigation with issuers in the past under the old Delisting Guidelines where their discretion extended arbitrarily beyond the scope and reach of the
SEBI-formulated framework. The new measure embedded in the Delisting Regulations could open the doors to more such litigation.
A timeframe akin to the timetable under the Take-over Regulations has been brought in. Luckily SEBI has refrained from asking for the Letter of Offer to be filed with SEBI.
It is a good pointer to how a similar dispensation ought to be introduced under the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Regulations”), where filings with SEBI result in inordinate delays in open offers getting cleared.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
