In recent times, the development of companies facing compulsory delisting orders from stock exchanges only to subsequently appeal the delisting order has become very common. It raises very critical questions about the regulatory framework governing such decisions. As the Securities Appellate Tribunal (SAT) observes this trend of increasing appeals, it highlights the importance of finding a balance between regulatory compliance and fair treatment of those companies who strive to see out their regulatory obligations.
This post aims to examine the evolving regulatory landscape of company’s compulsory delisting and provide suggestions to ensure the transition benefits all stakeholders. It emphasizes the need for flexibility in grant timelines for compliance with regulations, allowing companies that show intent to adhere to requirements a chance to remain listed, thereby protecting stakeholder interests.
The post explores the rising trend of companies appealing delisting orders, highlighting concerns over procedural fairness and regulatory compliance. It examines the legal framework, SAT judgments emphasizing intent and fairness, and suggests reforms to balance strict compliance with corporate realities, ensuring transparency and protecting stakeholder interests while fostering a healthy corporate ecosystem.
De-listing procedure
As stipulated by Section 21A of the Securities Contracts (Regulation) Act (SCRA), 1956, a recognized stock exchange is authorized to compulsorily delist the equity shares of a company. The procedure of delisting is provided in Chapter V read with Schedule III of the SEBI (Delisting of Equity Shares) Regulations, 2009.
The conditions for de-listing includes company’s compliance history, the nature of non-compliance, shareholding structure etc. If a company demonstrates willingness to comply and maintains communication with investors, this must be documented. Delisting can be reversed if the company demonstrates acceptable compliance
On the other hand, there should be appropriate communication where the fair value of delisted shares and the names of liable promoters are stated which will help ensure openness. Appeal against the order to delist shares can be filed under Section 21 L of SCRA, thus emphasising that due process must also be observed in the protection of shareholder interests .
Background of the Problem
In recent years, there has been a concerning trend involving compulsory delisting by stock exchanges that lack diligence and procedural integrity. Numerous appeals have been filed with the SAT, challenging such delisting orders. A common issue highlighted in these cases is the absence of proper hearings before delisting, with companies often not being afforded adequate opportunities to present their compliance efforts or intentions to rectify alleged violations.
IFL Promoters vs BSE Ltd.[i] exemplify one of the many cases where companies that, despite being under financial crisis or slowdown in business, want to revive the company and require additional time to comply with the regulations. This reflects how challenging the current delisting policy of the SEBI, along with the stock exchanges, is because it does tend to become more obsessed with mere strict compliance rather than the intention of the corporations involved in the case.
SAT’s approach on compulsory delisting with company Revival Efforts in Delisting Cases
The SAT has consistently underscored the necessity for due process in delisting cases. Notable examples include Divine Multimedia Ltd, Union Bearings (India) Ltd, and Softrak Venture Investment Ltd, all of which identified the Bombay Stock Exchange (BSE) as the common respondent. In each instance, the SAT found that the appellants were not afforded a hearing before the delisting committee, which constituted a breach of the principles of natural justice. Consequently, the Tribunal annulled the delisting orders and directed the BSE Delisting Committee to conduct a proper hearing before reaching a new decision.
In the recent cases of Yantra Natural Resources Limited vs. BSE[ii] and IFL Promoters Ltd. vs. BSE, SAT has emphasized the importance of reconsidering delisting orders when companies express a genuine intention to resolve outstanding compliance issues. In the Yantra Natural Resources case, the SAT, therefore, directed the company to address the identified instances of non-compliance and to make necessary payments within a given timeframe. Upon successful compliance, the BSE was directed to review its decision for de-listing and pass a reasoned order. The tribunal acceded to the willingness shown by the company to meet its non-compliance as an important consideration for permitting them to remain listed.
Similarly, in IFL Promoters Ltd., SAT observed that the applicant had shown intent towards the restoration of its listing. Outfall dues and necessary compliances with the listing agreement were ordered to be cleared so that trading could resume. The BSE was directed to give an explicit list of non-compliances and provide a fair opportunity to rectify the same.
These judgments are in consonance with the earlier landmark judgment in Entegra Ltd. vs. NSE,[iii] wherein SAT rejected a purely technical delisting approach. This judgment also emphasized a holistic scrutiny of the company’s efforts at compliance and remanded the case back to the Delisting Committee of the NSE for reappraisal and a de novo hearing. Overall, these judgments have reinforced the principle that there is a need to balance statutory compliance with corporate realities vis-a-vis rehabilitation and in promoting fairness in market operations.
Moreover, many directors genuinely wish to revive their companies but face substantial challenges due to the rigorous delisting policies enforced by stock exchanges. These stringent regulations not only restrict the directors’ ability to act but also adversely affect all associated stakeholders. There are numerous instances where company owners express a clear intent to rectify issues and revive their firms. Therefore, it is imperative that necessary relief measures be instituted to facilitate their efforts, ensuring a balanced approach that considers the intentions and challenges faced by these companies.
While SAT has focused attention on the need for the opportunity to be given to corporate entities for compliance with listing regulations, it must be recognized that not all cases require a re-hearing. The case of B S Appliances Ltd. serves as a foundational precedent; it was a company that had, in fact, been out of operations for 13 years showing a clear instance of non-compliance.
Thus, it stands to reason that while companies should be granted the chance to demonstrate their commitment to compliance, those showing patterns of negligence, lack of interest, or prolonged non-operation should not automatically receive a second chance. Re-hearing should not be a blanket remedy but rather reserved for cases where evidence of genuine intent to comply is present.
Regulatory discipline must be upheld without compromising market integrity. In situations where a company’s prolonged non-compliance is evident or where management appears disengaged, it is reasonable to deny a re-hearing and move forward with delisting to protect the interests of the broader market and its stakeholders.
Therefore, it is evident from recent precedents that a company’s intention to revive and its visible efforts to comply are crucial in delisting cases. However, there are cases in which the stock exchanges have been lenient, but the companies did not do anything meaningful to revive themselves. In Bhagyashree Leasing and Finance Ltd. vs. BSE Ltd.[iv], the SAT upheld the order of the stock exchange for compulsory delisting because the company, even after being given a one-year period for revival, did not make any efforts during that time and thus got delisted. The aforementioned judgement clearly demonstrates that although the regulatory frameworks need to provide opportunities for compliance, in cases where companies are exhibiting prolonged non-compliance and disinterest in the revival of operations, they must give precedence to market integrity and investor protection.
Stock exchanges often address delisting cases based on grounds that, while not critically severe for the company or the exchange, can have significant adverse effects on stakeholders. Where the exchange feels satisfied with a genuine intent on the part of companies to rectify compliance failures, they can take a reasonable and lenient approach. Strict compliance, in certain cases, can lead to unjust outcomes, particularly when a firm demonstrates genuine intent to address compliance issues, as such decisions directly impact the stakeholders involved. Although strict compliances are required in a robust securities market, the intentions and acts of the companies must also be considered before de-listing them.
Suggestions and Conclusion
In order to address regulatory challenges in delisting cases, stock exchanges must ensure strict adherence to the principles of natural justice. Before initiating delisting procedures, companies should be given a fair opportunity to present their cases and demonstrate compliance with specified obligations. Implementing a structured hearing process that allows companies to demonstrate their intent to rectify compliance failures can enhance transparency and fairness in decision-making, as highlighted in the IIFL Promoters case.
The threshold for delisting must be well established. Clear guidelines must be drawn up which will bring much-needed clarity to the criteria that delisting committees are supposed to consider in the assessment of any compliance issues related to a company. Such criteria must include consideration of all aspects of a company’s history, its commitment to rectification, and likely impact on stakeholders. This way, stock exchanges avoid arbitrary and punitive delisting decisions that may unfairly hurt genuinely compliant companies.
A balance must be struck between regulatory compliance and fair treatment of companies to promote the health of a corporate ecosystem. One such mechanism that may ensure the protection of stakeholders’ interests is the application of natural justice principles and properly defined threshold criteria for delisting decisions in the taking of cases. The regulatory framework should, therefore, evolve to reflect the nature of complexities and realism involved, thus supporting rejuvenation in the market and creating an environment conducive to sustainable growth.
This blog is written by Arihant Sethia and Kushal Agrahari, 3rd year BCom. LLB student at Gujarat National Law University.
[i] IFL Promoters vs BSE Ltd. MANU/SB/4042/2023
[ii] Yantra Natural Resources Limited vs. BSE MANU/SB/4576/2023
[iii] Entegra Ltd. vs. NSE MANU/SB/0905/2018
[iv] Bhagyashree Leasing and Finance Ltd. vs. BSE Ltd. 2023 SCC OnLine SAT 451