The Securities and Exchange Board of India (Sebi), since its formation as a capital market regulator, has taken numerous steps to increase investor protection and transparency in capital markets and improve corporate governance.
In the last few months, Sebi has announced many measures, which seem to be aimed at increasing the depth of the capital market, seeking to make delisting of companies difficult, as well as ring-fencing the promoters’ ability to hike their holding or their ability to get disproportionate voting rights.
This article broadly seeks to highlight certain key changes and the possible implications for Indian companies.
Delisting of equity shares
There are many reasons why a company may want to delist. They include lower compliance and disclosure requirements, lower corporate governance norms and the ability of promoters to have full ownership and control.
In the recent past, the Indian capital market saw a number of companies being delisted from the stock exchanges, including subsidiaries and associates of multinational corporations.
The delisting of securities from stock exchanges was governed by the Sebi Delisting of Securities Guidelines 2003 (Delisting Guidelines). However, with effect from 10 June, Sebi has promulgated the Sebi (Delisting of Equity Shares) Regulations, 2009, governing the delisting procedures for equity shares.
The regulations deal mainly with voluntary delisting, compulsory delisting and delisting of small companies. Certain key amendments to voluntary delisting of equity of shares are summarized below:
Minimum number of shares to be acquired: Earlier, it was required that the delisting offer result in reaching over 90% of the equity capital. This has now been tightened by providing more stringent norms. Now, for the delisting offer to be successful, it has been specified that the shares to be acquired should result in the post-offer shareholding of the promoters reaching higher of:
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* 90% of the total issued shares of the class, excluding the shares already held by a custodian and against which depository receipts have been issued overseas; and
* The aggregate percentage of pre-offer promoter’s shareholding and 50% of the offer size.
Pricing: The pricing earlier, as well as now, is based on a particular formula, which is the higher of the last two weeks or the last six weeks from a specified date. This specified date was earlier calculated from the date of the public announcement. It is now to be calculated from the board of directors’ meeting date; the idea seems to be to prevent an increase in the share price from the date of the board meeting to the date of public announcement.
Approval process: The approval process has now been made quite stringent. It requires not only a board resolution, but shareholder consent by postal ballot and voting by public shareholders in favour to be at least twice the number of votes cast against the resolution. Additionally, prior in-principle approval of the stock exchanges is required before making the public announcement.
Other changes: Certain key differences between the earlier and revised delisting guidelines are summarized below: Particulars of 2003 Delisting Guidelines versus 2009 Delisting Regulations:
• Applicability: Applicable to delisting of all kinds of securities; applicable to delisting of equity shares only.
• Restrictions: Delisting through buyback of securities not permitted; delisting of equity shares pursuant to buy back and preferential allotment not permitted.
• Delisting through rights issue: Promoters can delist securities pursuant to rights issue at rights issue price; this provision has been deleted, making delisting pursuant to rights issue not possible.
• Date of price determination: Price calculated from the date of the public announcement; price calculated from the date when the company informed the stock exchanges about the board of directors’ resolution.
• Relisting: Not before two years from the date of delisting; for voluntarily delisting, not before five years (for companies compulsorily delisted, not before 10 years from the date of delisting).
• Exit period for shareholders post-delisting: Six months; one year.
The threshold of the minimum number of shares to be acquired by the promoters for the company to delist poses significant challenges for companies to delist. For example, if a company has a promoter holding of 85%, for the delisting to be successful, the promoter would need to acquire at least 50% of the balance 15% of the public shareholding (that is, 7.5%) and reach a shareholding of 92.5% to delist.
Given that the past trends have shown that public shareholders tend to be reluctant to tender their shares or bargain for a very hefty exit price, and considering the criteria for getting shareholder approval through postal ballot, it seems extremely difficult for companies to delist.
The consequence of the failure of a delisting offer is that the promoter company must restore the public float in the company above 25% (in some cases, 10%) within six months from the date of failure of the voluntary delisting process.
Creeping acquisition by promoters: Sebi (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Sebi Takeover Code) governs the takeovers of listed companies in India. The Sebi Takeover Code also permitted promoters to increase their stake in a company by buying up to 5% of the company’s equity in any financial year till the holding reached 55% of the equity of the listed company. However, Sebi, vide its notification dated 30 October 2008, extended the route of creeping acquisition up to 5%, even to persons holding 55% and above (but below 75%).
However, there were certain ambiguities regarding the applicability of the aforesaid notification, namely, whether the 5% cap would be year-on-year or a one-time window available to the promoter.
Sebi has taken a view (in a circular dated 6 August) that a promoter can acquire additional shares up to a maximum of 5% in one or more tranches and that there is no specific time period within which one needs to complete its acquisition of 5%.
However, the creeping acquisition can be done over a period of one or more years, but subject to a maximum of 5% overall. Also, the 5% computation is by aggregating all purchases, that is, netting off sales is not permitted.
It is clear that Sebi has the smaller shareholder in mind. The idea appears to be to prevent companies from delisting, so as to provide an opportunity for shareholders to continue and if delisting is desired, to make it stringent and expensive to do so.
Additionally, ring-fencing of the creeping acquisition also appears to be aimed at protecting the depth of the capital market. While all these changes appear to have the interest of the smaller shareholder in mind, it has reduced flexibility of the corporate sector to delist and curtailed the ability of promoters to hike their stake.
Ketan Dalal is executive director and Manish Desai is associate director, PricewaterhouseCoopers.
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