Sebi attempt to review delisting norms gets differing views
Opinions are divided on the issue of whether the reverse book-building process should continue to be used for determining the price for delisting
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Mumbai: An attempt by the capital market regulator, the Securities and Exchange Board of India or (Sebi), to review the norms for delisting of publicly traded firms has elicited sharply differing views from within the industry.
Delisting of securities means the permanent removal of securities of a listed company from a stock exchange.
Sebi, which had released a discussion paper on 9 May, proposing to revamp the delisting guidelines, is currently in the process of collecting feedback from the public. The final norms are likely to be put out in the next three months after consultations with the Sebi board.
According to two people, including a top official at Sebi, opinions are divided on the issue of whether the reverse book-building process should continue to be used for determining the price for delisting.
“The views are equally strong on both extremes. While half of the views are in favour of current reverse book-building process for delisting, the other half is against it. There are conflicting suggestions coming. Sebi is analysing the comments and also going by the experience,” said one of the two people cited above.
Under the current rules, the exit price for voluntary delisting is set via the book-building process. The offer price has a floor price, which is average of 26 weeks’ average of traded price quoted on the stock exchange where the shares of the company are most frequently traded. There is no ceiling on the maximum price.
In its discussion paper, the market watchdog said that in case of successful delisting offers, a few market participants have apprehended that the success of the offer was due to tacit understanding between promoter(s) and a set of investors.
Similarly, when any delisting offer failed, a few market participants have raised concerns that the discovered price through the reverse book-building process has been unduly influenced by a set of investors who are mainly speculators. This led Sebi to question whether the process is leading to genuine price discovery.
According to Prithvi Haldea, chairman and manging director, Prime Database, a New Delhi-based primary market tracking firm, while reverse book building has its limitations, it is wrong to criticize it as many companies have successfully delisted using that route.
Haldea suggests that a single offer price for delisting could be considered by taking into account a longer time horizon, say two or three years. “If we factor in the share price over two-three years, then it will capture all the ups and downs in the price. The regulator should just put in place sufficient checks and balances so that the mechanism to arrive at the price is fair and neutral.”
One of Sebi’s proposals indeed is to allow companies to have the option to make a delisting offer at a fixed price, which will be either at a fixed premium to the floor price or a fair price as determined by merchant bankers to the delisting offers. Sebi is considering such a fixed-price mechanism, although at a market-determined rate, for delisting as reverse book building is not followed in most of the developed markets.
In other markets, a common practice is to enable the majority shareholders to indicate a fixed price for delisting after seeking the approval of minority shareholders.
Those who oppose the reverse book-building process say it has proved to be murky and inefficient.
“Instead of reverse book-building delisting should be done through an auction route. Like we have an OFS (offer for sale) for promoters to sell shares, we can also have an auction for purchasing shares. Ways to execute such an auction process could be worked out. Anything that is screen-based, transparent and instantaneous is always better,” said Sudip Bandyopadhyay, managing director, Destimoney Securities Pvt. Ltd.
Bandyopadhyay suggests that a company can complete delisting plans via the auction mechanism within 21 days of making an announcement, adding that an auction would prevent manipulation.
“Currently, reverse book building allows minority shareholders with significant holding to manipulate the exit price when a company announces its delisting plan,” he said.
“Whatever are the views, under the new delisting norms, Sebi’s primary aim will be to make price discovery mechanism in delisting purely market driven,” said the Sebi official cited above.
Over the past few years, increasing misuse of the delisting process, either for unfair gains by certain entities or to facilitate an easy exit for promoters, has caught Sebi’s attention.
Sebi’s paper said market participants have raised the concern that the acquirers are finding ways to side-step norms. “…either through parking their own shares by way of offer for sale (OFS)/institutional placement programme or through informal arrangements with a set of investors, they (acquirers) acquire such shares at a predetermined price and successfully delist the company at a price favourable to them. This adversely impacts true price discovery,” said the Sebi paper.
In a recent case, on 24 June, Sebi directed stock exchanges to monitor the delisting process of AstraZeneca Pharma India Ltd and allow the final delisting only after ensuring that the process has been fair and transparent.
The order followed a regulatory probe which made Sebi suspect alleged “collaboration” between AstraZeneca Pharmaceuticals AB—the parent entity of AstraZeneca Pharma India—and Elliott group. The Sebi probe revealed that an OFS by AstraZeneca in May 2013, which was subscribed 2.84 times, saw 94.02% of the shares being subscribed by a set of six foreign institutional investors or their subaccounts. Further, the OFS floor price was at a significant discount to prevailing market price.
“...it was prima facie observed that all these end subscribers (participatory note holder and subaccounts) are related, (hereinafter collectively referred to as the ‘Elliott group’),” said the Sebi order.