Expert Speak India Matters
Published on Jun 11, 2020
Will the pandemic increase the pace of delisting of Indian entities?

There are over 6,000 companies that are listed in the two major Indian stock exchanges in India - BSE & NSE. Some of these companies also have dual listing across these 2 exchanges.

In the past many years, there was a sense of bullishness and optimism in corporate India and its plans to list entities in the domestic stock exchanges. But the past many months of economic slowdown and the current Covid-19 crisis has made the valuations of stocks see historic lows (with deep discounting to their historic highs). The euphoric mood has ebbed and the sense of pragmatism that markets would take many months to recover is making many promoters of listed entities think on the concept of delisting their stocks and taking the company private. This includes both Indian promoters as well as foreign owners of companies listed in the Indian bourses.

The term "delisting" of shares means the permanent removal of stocks of a listed company from a stock exchange. Post the delisting, the company stocks will not be traded in that stock exchange. This process is governed by SEBI and has wide coverage of regulations that stipulate detailed regulations.

Delisting allow promoters the independence to restructure their businesses without the scrutiny of public shareholders and securities regulator; operationally, allows the company to focus in rebuilding the size, scale and profitability of the business, without the mandatory quarterly investor attention and associated ‘roadshow’ distraction. The process assumes that the promoter has the wherewithal to arrange for financing the shares purchase as part of the process.

Until recently, delisting was a difficult task as the investors demanded hefty premium to the current market price. A case in point being - BOC Group’s plan to delist its domestic arm Linde India had failed in June 2019. In the pricing discovery mechanism, the minority shareholders asked for nearly three times the existing market price (and was more than four-and-a-half times the floor price). However, the situation has suddenly changed following the Covid-19 outbreak and now investors would be ready to offer their shares at a reasonable premium due to uncertainty of businesses and valuations ahead. 

Categories of delisting

Compulsory delisting refers to permanent removal of securities of a listed company from a stock exchange as a punitive action at the behest of the stock exchange, for not complying with listing agreement conditions. Over 1,000 companies have been subjected to this regulatory action in the past 5 years. Companies delisted under this category enforces that its promoters and promoter groups and its whole time directors, cannot either directly or indirectly, access the securities market and also cannot seek a listing of securities for a period of 10 years.

In voluntary delisting, a listed company decides on its own to permanently remove its securities from a stock exchange, subject to the prescribed regulations.

As per Regulation 4 of the Securities and Exchange Board of India  (Delisting of equity shares), 2009, delisting is not allowed as the following:

  • Until it’s at least 3 years from the date of listing of its equity shares
  • Pursuant to buyback of shares
  • When the company wants to make preferential allotment
  • When any entity belonging to the promoter or promoters group was sold in six months
  • When the promoter or promoter group wants to exit the company by selling its shares

Minority shareholders & price discovery:

The offer price has a “floor price” and should be determined according to regulation 8 of SEBI takeover code regulation 2011. There is no ceiling on the maximum price.

The reference date for computing the floor price would be the date on which the stock exchanges were notified of the board meeting in which the delisting proposal would be considered.

Delisting regulations include safeguards for the protection of minority shareholders. The delisting proposal needs approval not just from the company’s board, but also from shareholders via a special resolution — needing 75% votes in favor of the delisting idea. And the shareholders can dictate the price at which they are comfortable selling their shares back to the promoters, through the process of Reverse Book Building.

Reverse Book Building is basically a process used for efficient price discovery. It is a mechanism by which offers are collected from the shareholders at various prices, which are above or equal to the floor price.

Procedural compliances:

SEBI’s delisting norms are exhaustive to ensure that the companies intending to delist follow an elaborate process, which is time-bound as well as transparent. The intending company has to appoint merchant bankers and book-running managers, who are registered with SEBI.

Before making a public announcement, the acquirer or promoter should open an escrow amount and deposit the total amount of monies (or a bank guarantee for that amount) on the basis of the arrived floor price, multiplied by the number of outstanding public shareholding. At each stage of the delisting process, the intending company should make public announcements too.

Can company list again after delisting?

Reinstatement of the delisted securities would be permitted by the stock exchanges only after a cooling period of 2 years. This would be based on then applicable regulatory criteria for listing.

Board governance implication:

The independent directors have a fiduciary duty to guide shareholders on the delisting bid and to protect the interest of the minority shareholders.

Unlike regulations in some of the developed markets, which seek the independent directors to comment on the pricing offered to minority shareholders, Indian regulations does not put the focus on them; it simply asks for their approval for the delisting process, without even assigning the rationale for delisting. The regulations only seeks that the promoter does not use company finances to fund the delisting transaction.

In summary, delisting process is a test of the free-markets theory. Regulations permit the shareholders to ask for a price in case they are comfortable selling their shares, back to the promoters. So in essence, it’s demand-supply at work. If the pricing & appetite for shares at that price matches, the delisting would be successful.

Equity share is a way of sharing risk & rewards of a company’s performance. There is no guarantee for the company’s success. There are few Indian companies that are in process of seeking shareholder approval for delisting and those who are opposing it are worried that the promoters are being opportunistic. Criticism will always remain for every argument and well, that’s free markets at play.

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