Mumbai: Capital markets regulator Securities and Exchange Board of India (Sebi) is likely to introduce new norms to ensure that the money of investors in around 3,000-odd firms delisted from defunct stock exchanges is not stuck indefinitely.

The new norms will require these companies to compulsorily make an exit offer to their shareholders within 3-6 months, if they fail to either get listed on a nationwide stock exchange or fail to sell their businesses within 18 months from the date of the exit of the exchange on which the companies were originally listed.

Two persons directly familiar with the development, one of them a top Sebi official, confirmed this, on the condition of anonymity as the final norms are yet to receive an inter-departmental clearance at Sebi.

At present, following the exit of 18 regional exchanges since 2014, there are around 3,000 companies that have been moved to the dissemination board of nationwide stock exchanges such as the BSE and NSE, since they failed to get listed on the latter.

In January 2015, Sebi had said firms exclusively listed on exiting regional stock exchanges will be given 18 months to get listed on nationwide stock exchanges. Till the time of listing, such firms could be moved to the dissemination board of a nationwide stock exchange.

At present, there are no norms on dealing with shareholders of companies in the dissemination boards, the timeline for such companies to get listed, the exit offer mechanism for companies in the dissemination board and the regulatory action against promoters of non-compliant companies.

The dissemination board provides an 18-month window for exclusively listed firms to exit stock exchanges and either get listed on the nationwide stock exchange or sell their businesses to another party. This is to ensure that the shareholders of such firms are able to either liquidate their holdings or withdraw their investments through a delisting offer if the company chooses to take its stock off the exchange trading platform.

“Such firms cannot remain in the dissemination boards indefinitely since the shareholders’ money in these firms will remain stuck till the time they either get listed or delisted," said the first person.

The new norms will require companies completing 18 months on the dissemination boards to make an exit offer at a fair market price, for which such companies will have to appoint a third-party valuer agency. The valuer agency will decide the price of the exit offer and the cost at which the companies can liquidate their assets to eventually leave the exchange completely.

Sebi will be stricter now with the promoters of such firms and under the upcoming norms, the market watchdog will initiate penal action against promoters of the firms which neither get listed on a nationwide exchange nor initiate the delisting process after 18 months.

“Sebi will introduce the new norms shortly. The companies that were listed on defunct exchanges cannot be given an indefinite period to get listed on another exchange or sell their business to another company or delist the company altogether so that the investors in such companies do not suffer and their money is not stuck in the company indefinitely just because of the company’s decision," said the first person.

At the dissemination board, a willing buyer and seller are given an opportunity to disseminate their offers using the services of brokers of the exchanges hosting the board. Dissemination of offers means sharing the price and company information at which the company offers or intends to sell its stakes to another party. Such sharing of price information is done within a certain group of brokers who are registered with the dissemination board.

The buyers and sellers are required to register with the broker of the exchange where the board is set up. No contract note is required to be issued for such transactions and the matched trades need not be settled through the stock exchange or clearing corporation mechanism.

“Sebi wants to ensure that common shareholders in these 3,000 companies on the dissemination board do not suffer. The overall market sentiment has to be protected. Sebi has given several options for companies on exiting exchanges. They could list their shares as per the provided diluted norms Sebi made; they could opt for delisting; or they could have just sold their business to another promoter who could run it in a better way and treat all shareholders equally. But Sebi can’t provide unlimited time to companies to opt for one of the ways," said the second person.

On 25 May, outlining the priorities for 2016-17, Sebi chairman U.K. Sinha had said the regulator will attempt to significantly reduce the number of listed entities as thousands of them are either suspended or very thinly traded.

As per the plan, Sebi will ask companies that have been suspended from trading for over seven years to delist from the exchanges by giving an exit option to investors. Such companies are typically suspended from trading for non-compliance with rules. Technically, they are still listed and hypothetically, they can start trading again if they become compliant. There are about 1,200 such entities, Sinha mentioned.

However, for companies that were migrated from defunct exchanges to the dissemination boards of nationwide exchanges, there are no norms in place to be followed after 18 months.

The Hyderabad Securities and Enterprises Ltd (erstwhile Hyderabad Stock Exchange), Coimbatore Stock Exchange Ltd, Saurashtra Kutch Stock Exchange Ltd, Mangalore Stock Exchange, Inter-Connected Stock Exchange of India Ltd, Cochin Stock Exchange Ltd, Bangalore Stock Exchange Ltd and Ludhiana Stock Exchange Ltd are among the 18 regional bourses that have been granted approval to exit exchange operations.

“I do not support this approach of Sebi to put burden on the promoter to offer an exit to other shareholders just because the exchange on which the company was listed exited operations... Sebi should have merged the businesses of smaller exchanges with the bigger exchanges. Many of the companies on the dissemination boards are loss-making and the promoters may not have the financial ability to provide an exit to all the other shareholders," said Sudhir Bassi, executive director at law firm Khaitan and Co.

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