India is perceived to be a tough market for delisting as the existing norms have not only stopped the MNCs from listing here but even made many buyouts combustive. SEBI (The Security & Exchange Board of India) has been easing the delisting process over time in an iterative and continuous manner. There are changes proposed in June 2021 which have made the process much easier and before that, there were also changes in the last year which allowed relaxation in terms of a counteroffer and so forth.
The recent amendment enforced by the market regulator SEBI in September 2021, which allows Open Offer and Delisting together at differential pricing would certainly make M&A (mergers & acquisitions) easier and much more seamless. SEBI has been bringing about changes for ease of delisting and prioritizing the interests of the investor almost always. In this article, we will decode the delisting aspects of the market and new norms issues by the regulatory SEBI.
Background of Delisting by Market Regulatory
For every mature market, entry and exit must be equal. On the entry front clearly Indian regulatory has done a lot of work and have facilitated smooth entry for MNCs companies. Similarly, on the exit front delisting is also an important factor. Considering earlier amendments of the Delisting norms, they stated that if there was a mandatory open offer then one must just do the mandatory offer in a prescribed way and wait for a delisting subsequently. A change in the changes made in 2015 allowed that instead of the mandatory open offer, one could go down the delisting way, make a delisting offer and if that offer is successful then it may delist the company. And if the offer is not successful, the company must come back and pick up again the same process of the open offer. Finally, in June 2021 SEBI came up with the counteroffer option for the companies.
Now, the latest framework harmonizes the two processes, and a company can now go down simultaneously for both the Open Offer and Delisting in one go and depending on the take-up the company can make its decision.
What is the New Delisting Framework?
With the issuance of a new framework, it is now not just about equalizing the ease of entry and exit of the company. There is a deeper philosophical point which is for maturing the capital market and in terms of better governance where one needs a very efficient market for a change of corporate control. Corporate control is considered an asset by itself and there is a potential market for it as well. The regulation had many inefficiencies in it earlier, and this amendment is one of the biggest ones mainly with the ability to sort out the delisting problem.
These new norms solve a problem both at a technical and philosophical level though, in future few iterations might still be required to make it complete and comprehensive. There are two major changes according to the latest amendment issued by SEBI.
- They have effectively abandoned the concept of reverse book building at least during the first attempt of delisting. Reverse Book Building is a mechanism via which the Acquirer/Company offers to buy back the shares from its respective shareholders
- The existing obligation has been scrapped and set at 90 percent instead of 75 percent with the new delisting threshold.
Now, in pursuance of the latest amendment one can do these both simultaneously, and SEBI in it expressly admits to all the stakeholders. They use the phrase ‘directionally contradictory transactions in a sequence’, which in itself is a big admission by SEBI. The new guidelines listed by SEBI euphorically mention the delisting process now as rational & convenient in terms of the way forward where one can get a 12-month period to make successive attempts at delisting.
These two changes chained together is almost like a huge generational improvement & considering the situation from SEBI side. This is going to make a huge difference to the market of corporate control which primarily includes both the strategic acquirers as well as the private equity acquirers. Undeniably, it’s a big change in the corporate control market and it is going to provide a huge boost for control transactions.
The main features of the amended framework of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 for delisting pursuant to an open offer are as follows:
- The framework in case of the open offer under the takeover regulation or incoming acquirer who is seeking to acquire control under regulation 3(1) or 4 or 5.
- If the acquirer is willing to acquire, they have to bid a higher price for delisting at a suitable premium over the offer price.
- In case of response to the open offer is that 90% of the people apply then every shareholder gets the same delisting price.
- In case the response is not 90% then they have to pay the same takeover price to all the shareholders.
- If the company does not get delisted and the acquirer crosses 75% of the offer, then a period of 12 months will be given in that case. If the time limit expires then the acquirer has to comply with minimum public shareholding.
- If the acquirer opts for remaining listed after acquisition and the total stake reaches above 75% then the acquirer has to look for scaling down the purchases in such a manner that the line of 75% is never crossed.
- While undertaking delisting under this framework, all the provisions of the Delisting Regulations shall be applicable mutatis-mutandis, otherwise provided in this framework.
Effects of the amendment on Buyout situation
Buyout situation has become much easier after the SEBI relaxation of delisting norms. With most companies today following the market sentiments and jumping the bandwagon of listing as early as possible, record-breaking IPOs have occurred in the Indian market over the last few months but we often forget that there are few companies that would like to delist. And delisting used to be reasonably rigid and impractical for all the valid reasons but the changes that SEBI made is one huge step in the right direction providing options and control to the company stakeholders.
Foreign strategy’s keen interest in acquiring control of an Indian entity waned significantly because the company was listed and delisting for all practical purposes was not possible. That diminishing interest is bound to change now with these prudent & balance guidelines from a forward market looking regular like SEBI. These guidelines would certainly provide a much-required blitheness to particularly inbound M&A’s listed companies.
Conclusion
The new amendments passed by the SEBI have reduced the tight constraints predominant in delisting and removed all the hassles involved in public M&As which until now handicapped acquirers to delist a target company in a systematic and flexible manner all the while prioritizing the stakeholder’s investment as well. The latest amendments made by SEBI were anticipated by the investors which will provide a coherent way-out for the companies to gracefully exit the Indian market. With these changes, an acquirer can now attempt a delisting by offering what they believe is a reasonable commercial price without worrying much about an exorbitant price quoted by the mechanism of reverse book building.
For further information, please contact:
Gautam Khurana, Managing Partner
India Law Offices, New Delhi
e: moc.seciffowalaidni@anaruhk.g
t: +91 11 24622216
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