Introduction
The Securities and Exchange Board of India (“SEBI”) revised the delisting process for public companies on 25th September 2024 with the approval on amendments discussed in its board meeting on 27th June of the same year. The Securities and Exchange Board of India (Delisting of Equity Shares) (Amendment) Regulations, 2024 (“Amended Regulation”) reintroduced the fixed price process of voluntary delisting alongside the Reverse Book Building (“RBB”) method, creating two alternatives for any company delisting its equity shares from the public markets.
The fixed price method was first introduced in India through thecircular issued in 1998. However, it was replaced with RBB via SEBI (Delisting of Securities) Guidelines, 2003, considering the threat faced by minority shareholders in the streamlined process of the fixed price method. The amendments brought forth by SEBI reintroducing the fixed price method after two decades align with its broader objective of protecting minority shareholders while maintaining the ease of doing business taking into account the wide consensus on RBB making the delisting process complex and prone to manipulation. The inclusion of both RBB and fixed price method for frequently traded shares reflects SEBI’s commitment to balance the interests of minority shareholders with that of the acquirer or promoter proposing the delisting of a public company.
This article critically evaluates the fixed price method reintroduced in the 2024 amendment in comparison with the RBB method of delisting. The flow of the article tries to capture the essence of the practical flow of events in the process of delisting and hence establishes the baseline with a brief discussion on the setting of floor price and determination of reference date in both delisting mechanisms.
Setting the Floor Price
In order to initiate the process of delisting under any of the two alternative methods available, setting a floor price is necessary. Floor Price, similar to its understanding in economics, is the minimum price set that the acquirer has to pay the public shareholder to buy back the shares of the company. The process of calculating the floor price under the RBB method is similar to its calculation for an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”). Similar to the provision laid down under Regulation 8 of the Takeover Code, the floor price for frequently traded shares is the highest of the negotiated price in the underlying acquisitions, volume-weighted average price (“VWAP”), i.e., the average of the price and volume the security has traded in a day, or person acting in concert (“PAC”). Here, PACs are individuals or companies that co-operate for shares of the target company The price is calculated keeping in consideration the reference date, i.e., the date on which the stock exchanges were notified of the listing company’s decision to delist. For infrequently traded shares, the determination of the fair value by an independent valuer along with the above-mentioned parameters decides the floor price.
In the new amendment brought into practice, certain revisions have been introduced in the calculation of floor price under the fixed price method. For frequently traded shares, the process of determining the floor price now stands in consonance with the process for infrequently traded shares under RBB. The additional parameter of ‘adjusted book value’ as per Regulation 19A of the Amended Regulation is nothing but the fair value computed by an independent valuer. In the case of frequently traded shares, the market price is generally considered an accurate measure of the fair value of shares for the simple fact that the shares are frequently traded which leads to timely documentation in the market.
Albeit the new amendments provide certainty by not subjecting the acquirer to any reverse mechanism of pricing, the reason for deviating from the Takeover Code remains ambiguous. To prevent an acquirer from timing the delisting process when the market is down, the floor price could have been based on the average market price over a period of time. This would simplify the process without adding new, complex parameters.. In asset-intensive sectors, like mining or automotive, current market conditions, cash flow, or growth potential are not reflected in the book value making it not the most accurate representation of the fair market value. Hence, it is always advisable to have a flexible method of valuation.
When figuring out the reference date for delisting under the fixed price method, we look at either the date when the public announcement (“PA”) was made or the date when the stock exchanges were given advance notice. This rectifies the anomaly that existed in the pre-amendment system and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 where the former based its reference on the date on which the stock exchange was notified of the board’s decision to delist while the latter mandated intimation to the stock exchange two business days before the delisting process would be considered by the board. This created a gap where the information that the company would delist itself spread in the market leading to volatility in the stock prices and price speculation. The case of Brady and Morris Engineering Company in 2020 where the prices soared as high as 1128.7% over the floor price further affirms this phenomenon.
RBB vs Fixed price method: Comparative study of Delisting Alternatives
After the floor price of shares has been set, the procedure for delisting under RBB essentially resembles a bidding process. The acquirer initiates the process by giving an indicative price that is either equal to or more than the floor price which is subject to approval from the board of directors and more than 75% of voting shareholders. The entire mechanism is devised to determine the discovered price, i.e., the price on which the shareholders will eventually tender their shares. The process fails to achieve its objective as achieving the set threshold of 90% faces issues of speculative trading and overestimated exit prices caused by disproportionate power in the hands of some shareholders. The speculators or public shareholders demand unreasonably high prices plaguing the acquirer’s route of acquiring 90% of shares in the listed company. Not conceding to the offered price results in the failure of the bid after which a counter-offer can be proposed. However, the mechanism breaks down as the threshold of 90% is not achieved making the entire process a game of dead ducks.
One of the key differences between RBB and the fixed price method is the lack of involvement of public shareholders in the latter. However, the interest of minority shareholders is safeguarded as the fixed price proposed has to be at least 15% more than the floor price as per Regulation 19A. On top of that, it’s ultimately the shareholders who decide whether to accept or reject the offered price. If the delisting doesn’t go through, the acquirer can step in with a counter-offer, but only if at least 50% of public shareholders show interest. This is quite a change from the earlier requirement of 90% set by RBB.. This streamlined process is expected to ease the delisting process on the acquirer’s end and provide a considerable margin to international companies with large stakes in their Indian-listed subsidiaries. Further, introducing an alternative fixed price method increases flexibility in the system. It introduces a sense of convenience and choice for the promoter while bringing the system in consonance with leading jurisdictions like the USA, Hong Kong, and Singapore. However, the lack of transparency and absence of active participation of minority shareholders raises contentions about the purchase of shares at a price not reflective of the true market value of shares or the potential undervaluing of shares by the purchaser.
Conclusion
The reintroduction of the fixed price method indicates RBB’s failure to curb price manipulation and ensure a smooth delisting procedure. Through these amendments, SEBI aims to establish a balance between both the purchaser and the seller of the shares of a delisting company. While the process of bidding under RBB is favourable for the shareholders, the streamlined fixed price method sets an authoritative tone in favour of the acquirer. The shortcomings on the extreme ends of both the processes, i.e., unreasonably high prices and undervalued shares provides adequate scope for potential mishaps and in turn effective regulation. It would be interesting to observe the grounds on which a listed company chooses an alternative delisting procedure over the other. It will be of considerable significance to note how much of this dream of a yin-yang stays intact in the stock exchanges.
An appreciable quality of the amendment brought into force is the introduction of a threshold of 15% while deciding the fixed price method creating a safe zone for the shareholders. Additionally, the lowering of threshold in the amended regulations is a significant relaxation. However, acquiring the residual shares remains a complex process with the involvement of the National Company Law Tribunal. This ushers in a chance of creating a framework for ‘squeezing out’ the remaining shares as the process of delisting would remain unfinished if the acquirer fails to buy back the whole of the lot. As the amendment only caters to frequently traded shares, it would be a step in the right direction to expand the scope of the legislation to also include infrequently traded shares. Further, establishing coherence in the combined delisting and open offer route gains importance in order to preserve the synergy between the Amended Regulations and the Takeover Code.
This blog is written by Samridhi Singh and Aditya Kumar, Third-Year B.A., LL.B. Law Student.