The Securities and Exchange Board of India (SEBI) had been reviewing delisting regulations for over a year to address concerns about operators who manipulate stock prices around corporate events to extract more than the fair value from company promoters.  Last year, it was emphasized that the regulator aims to prevent entities from feeling trapped in the market – meaning ensuring that companies can delist, and investors can exit without undue difficulty. Following the approval of the proposal during the meeting of the board of the Securities and Exchange Board of India (SEBI) June 27, 2024, SEBI, on September 25, 2024, issued the Securities and Exchange Board of India (Delisting of Equity Shares) (Amendment) Regulations, 2024 (Amendment Regulations).

 

Previous Regime

In the past, companies that wanted to delist from the stock exchange were required to follow the reverse-book-building process. This method involved the acquirer setting a floor price, or base price, through a prescribed procedure. This floor price was then offered to the remaining public shareholders. Additionally, the acquirer had the option to propose a premium above this floor price to make the offer more attractive. Public shareholders would then tender their shares through the stock exchanges, quoting the price at which they were willing to sell their shares. The delisting process would be deemed successful if the acquirer managed to increase their holding to over 90% of the total shares.

 

However, if the acquirer was not satisfied with the tender price, they had the option to make a counteroffer. This counteroffer could only be made under specific conditions. One of the key conditions was that the acquirer’s post-offer shareholding had to exceed 90% of the total shares, based on the number of public shareholders who were willing to sell their shares at the counteroffer price.

In the reverse book-building process, shareholders have the power to determine the price at which they are willing to sell their shares. This method ensures that shareholders have a significant say in the delisting process and can negotiate for a price they find acceptable. However, in practice, this method often led to repeated failures in the delisting process. It was believed to be vulnerable to exploitation by investors and shareholders who could demand excessively high selling prices, ultimately causing the deal to collapse.

 

Key Amendments

 

  • Fixed Price Regime

 

Under the Amendment Regulations, acquirers now have the flexibility to either use the reverse-book-building process or offer a fixed price to the remaining shareholders. This fixed-price option is available only if:

  • the company’s shares are frequently traded; and
  • the fixed price must be at least 15% higher than the floor price determined through the prescribed method.

 

If a sufficient number of shareholders accept the offer and the acquirer’s holding exceeds 90%, the delisting process is successful.

 

  • Revised Counter Offer Conditions

 

For the reverse-book-building process, the criteria for making a counteroffer have been relaxed. The acquirer can now make a counteroffer if their post-offer shareholding exceeds the higher of the following two thresholds:

  1. difference between the acquirer’s current shareholding and 75% of the total issued shares; and
  2. 50% of the public shareholding.

 

These changes aim to provide more flexibility and fairness in the delisting process, ensuring that both acquirers and public shareholders have clear and equitable options. By allowing a fixed-price mechanism and lowering the threshold for counteroffers, the regulations seek to streamline the delisting process and make it more accessible for companies while protecting the interests of public shareholders.

 

While the reverse book-building process is considered more “democratic,” it often fails due to misaligned price expectations. The fixed-price delisting mechanism offers a significant advantage by providing a clear and predictable outcome for both shareholders and promoters. This approach minimizes the uncertainty and speculation that often accompany fluctuating market prices. It further aims to streamline the market by preventing large shareholders from controlling or dictating prices, which will instead be set by promoters based on the SEBI formula.

 

Additionally, the new delisting regime eliminates subjectivity and stops a small minority of shareholders from hijacking the delisting process, thereby protecting the interests of the larger public shareholders who seek an exit. Offering the choice between the reverse book-building process and the fixed-price mechanism gives acquirers greater flexibility. However, many investors are expected to prefer the fixed-price delisting model.

Authors & Contributors

Partner:

Ramya Suresh

 

 

Associate:

Amitabh Abhijit