Financial liberalization in India has benefited both the corporates and the public at large as trading via securities has assumed significant proportions in the country. The Securities and Exchange Board of India (SEBI), constituted in the year 1992 to act as the watchdog of financial markets in India, has been instrumental in contributing to the growth of the securities market. Capital markets provide an ideal route to companies to raise funds from the public in order to meet their large fund requirements. In turn, the public gets a stake in the company and benefits from the periodic return on its investment.
Listing and delisting of securities are commercial calls, based on business considerations. The market conditions, structure and functioning of companies, among others, greatly influences the decision whether or not to trade (or continue to trade) in public.
This bulletin briefly decodes the method of delisting of securities from stock exchanges in India, the shortcomings in the SEBI (Delisting of Securities) Guidelines, 2003 (Delisting Guidelines) and a few suggestions to render the guidelines more effective.
1.0 Delisting- Meaning
‘Delisting’ implies permanent removal of securities from stock exchange(s). As a result of delisting, the public can no longer trade in the securities of the delisted company. In turn, the delisted company becomes a closely held company. The company may continue to remain a public limited company but it is no longer listed on any of the stock exchange(s). For the shareholders, this would mean complete loss of investment opportunity from the delisted company.
There are several methods to delist from stock exchanges. The various methods1 as stipulated in the Delisting Guidelines are as follows:
2.1 Voluntary delisting
A company can voluntarily choose to delist from stock exchange(s). However, it is essential that the company is listed for a minimum period of three years on any stock exchange before it can elect to delist.2 The shareholders have to be provided with an exit opportunity by the promoters or those who are in control of the management.3 Further, the company must fulfill the following conditions:
- Obtain a special resolution4 from the shareholders of the company to delist. It is important to mention here that obtaining a special resolution may not be easy in every situation. For instance, where the majority has 75% or greater stake in a company, passing the special resolution is not difficult. However, problem arises where the majority has less than 75% control over a particular company since then an affirmative consent and participation of the minority becomes essential to pass the special resolution. The minority shareholders can vote against the resolutions which are averse to their interest. In the absence of a special resolution, initiating delisting process would be unfeasible.
- Appoint a SEBI registered merchant banker (the banker should not be an associate of the promoter).
- Make a public announcement5 containing details like the floor price, how it was reached, opening and closing dates of the bidding, name of stock exchange(s) from which the securities have to be delisted, reason for delisting, shareholding pattern, capital structure of the company (pre and post-delisting), details of the escrow account (to inform the public about the account where the funds will be deposited by the delisting company as the public shareholders of the company, who will sell their shares to the latter, will be paid from the amount deposited in the escrow account).
- Apply to the delisting stock exchange (the exchange where the securities are listed) in the form specified by the exchange along with the copy of the special resolution. This is a plain paper application and should include, among other points, the rationale for delisting.
- Comply with additional conditions, if any, specified by the concerned stock exchanges from where securities are to be delisted.
The exit price is calculated in accordance with the book-building process6. Typically, the offer price has a floor price i.e. the minimum base price. This price is the average of twenty six weeks traded price quoted on the stock exchange (where the shares of the company are most frequently traded) preceding the date of the public announcement. There is no ceiling on the maximum price.7 For a valid delisting, it is important that the offer for delisting results in the public shareholding falling below the threshold limit of the required public holdings as stipulated in the listing agreement.8 In the event of securities being delisted, a further period of six months must be provided to the remaining shareholders to tender their securities at the same price.
2.2 Compulsory delisting
A stock exchange may compulsorily delist the shares of a listed company under certain circumstances. In such a case there is no provision for an exit route for the shareholders. Common causes for compulsory delisting are absence of trading or negligible trading, non-redressal of investors’ complaints despite repeated reminders, unfair trading practices at the behest of the promoters/management, other malpractices such as fake original or duplicate or share certificates deliberately issued by the management.9
A stock exchange can delist companies suspended for a minimum period of six months for non- compliance with the listing agreement. Instances of non-compliance and de-listing of shares by stock exchanges are mostly due to non-payment of listing fees and non-availability of the reports (from the companies) as per the listing agreement. When this occurs, the stock exchanges are required to give adequate notice (fifteen days) to the public during which any person aggrieved by the proposed delisting can make a representation to the exchange.10 In case of compulsory delisting, the promoter of the company is liable to compensate the security-holders of the company by paying them the fair value of the securities held by them and acquiring them. Alternatively, the security-holders have the option to stay with the company.11 The purpose of giving the minority a right to remain within the company when it is delisted and no longer involved in active trading does not really appear to serve any purpose, other than a right to dividends.
Further, in mergers and amalgamations and under legal directions for sick companies12 by the Bureau for Industrial and Financial Reconstruction, companies can be delisted. Mergers and amalgamations result in change of management and control of companies. The reconstituted management may want to remove the company from the stock exchange to terminate public trading of the company’s shares and convert it into a closely held company.
3.0 Shortcomings and suggestions
The existing Delisting Guidelines came into force on February 17, 2003. Over the years, it has been felt that there are a few provisions in the Delisting Guidelines which are inadequate and call for modification. The following gives a brief overview of some provisions which require changes and the corresponding suggestions. These suggestions are based on the SEBI paper titled “Concept Paper on the proposed SEBI (Delisting of Securities) Regulations, 2006”. The regulations have not yet been implemented.
1. Book building process – The current methodology adopted to determine the exit price of securities does not seem to be fool-proof. SEBI concept paper on proposed delisting regulations indicates that the book building method has resulted in disproportionate powers with public shareholders holding major portion. Also, cases of frivolous bids to destabilize the delisting offer, freedom to promoters to reject the price discovered, revision of bids leading to cartelization in the discovery of price cannot be denied. Hence, the book building process, which was introduced with a view to determine a fair exit price has failed to achieve its objective and often times has not provided a legitimate price due to the foregoing reasons.
Suggestion – An alternate pricing mechanism wherein the price could be the higher of (a) the fixed price which would be the floor price13 plus a premium of 25% and (b) the fair value determined by an accredited rating agency plus a premium of 25%.
To illustrate: (a) Assume that the floor price is INR 15014. Premium is 25%. The total value of the offer price will be: 150+ (25% of 150). This would imply that the exit price as per (a) is INR 187.515. (b) Assume that the fair value determined by an accredited rating agency is INR 9016. Premium is 25%. The total value of the offer price will be: 90+ (25% of 90). Hence, the exit offer price as per (b) is INR 112.517. Since the higher of the two values is INR 187.5, therefore, the offer price for exit option would be INR 187.5.
2. Reference date for calculating the floor price – Presently, the date of calculating the floor price is the date of the public announcement. This results in fluctuation of the price from the time when the decision to delist is taken at the board meeting of the company and the date of public announcement.
Suggestion – To eliminate the above irregularity, the reference date for calculation of the floor price is proposed to be the date when the company notifies the stock exchange about the board meeting in which the delisting proposal was considered.
3. Absence of minimum subscription limit – Under the existing Delisting Guidelines, crossing the stipulated threshold limits as prescribed for ‘continuous listing requirement’ (which is 25% or 10% depending upon the listing agreement) determines the success of an exit offer. Therefore, as soon as the public shareholding reduces below the stipulated level, a company is bound to be delisted. The idea of prescribing threshold limits under clause 40A of the standard listing agreement is hinged on good corporate governance but adopting the same levels for delisting has resulted in delisting of companies in spite of presence of significant public shareholding. For instance, if a company, post-delisting, continues to have 15% public shareholding, still has a sizeable number of public shareholders.
Suggestion – Minimum subscription level is essential to ensure investor protection. In this light, SEBI in its concept paper has proposed to introduce minimum subscription levels. Accordingly, the success of the offer would depend on a minimum subscription causing the public shareholding to reduce below 10% or 4%. Thus, the promoter holding would have to cross the 90% level or 96% level, as the case may be, depending on the listing agreement.
4 Lack of specific timelines – The existing guidelines are not comprehensive in the sense that they do not prescribe definite time lines for various activities. It simply prescribes the procedures that have to be followed by companies intending to delist.
Suggestion – Introduction of definite time frames for each stage of the delisting process would improve the efficiency of the whole process and infuse transparency in the system.
Lately, delisting (voluntary delisting in particular) of companies has become a frequent phenomenon in the securities market of India much to the concern of the investors. One of the main causes for this is that many foreign companies have acquired listed Indian companies and subsequently delisted their shares from stock exchanges in order to gain full control over them. Besides, many indigenous companies have also resorted to delisting. Usually, the companies have delisted due to depressed market conditions or lack of trading of the company’s shares in the stock markets, which are genuine cases for delisting. However, there have been cases where companies have delisted and subsequently listed themselves on the stock markets at better prices.18
Delisting per se should not be restricted. So long the principles of corporate governance are followed and the minority interest is protected, there is no substantial argument against delisting. It has to be borne in mind that the principal idea of listing a company on stock exchange is to facilitate liquidity. The public investors play a significant role. As public money is involved in the whole exercise, hence, due care should be taken to offer the public investors a fair and transparent exit value at the time of delisting. The stock exchanges should carefully scrutinize the state of the company before compulsorily delisting any company. Further, the delisting process should be made more transparent and efficacious by modifying the existing regulations. This will certainly cater to the interest of both the investors and the companies at large.
1 Guideline 4 of the Delisting Guidelines.
2 Guideline 5 of the Delisting Guidelines.
3 However, in cases where the securities continue to be listed on a stock exchange having nationwide trading terminals (i.e. Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) or any other stock exchange specified by SEBI), an exit opportunity need not be given. The rationale being that in case the securities continue to be listed on such stock exchanges, the liquidity of the shareholders will not be affected even if the securities are delisted from other stock exchanges. The shareholders can exit any time they decide to do by way of selling shares in NSE/ BSE.
4 As per section 189 of the Companies Act, 1956, a special resolution is a resolution passed at the general meeting of the shareholders of the company, wherein 75% of those present and voting must vote in favor of the resolution.
5 The public announcement should be made within a period of two working days from the determination of the final price.
6 In this process, the offer price of a security is determined at the rate at which maximum numbers of shares are tendered.
7 In case of infrequently traded securities, the offer price is calculated as per regulation 20(5) of SEBI (Substantial Acquisition of Shares and Takeover) Regulations.
8 Usually, the minimum public shareholding limits are 25% or 10%. This depends on the listing agreement. Listing agreement is the agreement entered into between the company and the concerned stock exchange (where the securities are listed) at the time of listing of securities.
9 SEBI, “Report of the committee on delisting of securities of companies listed on recognized stock exchanges index”. http://www.sebi.gov.in/commreport/dlist.html, accessed on May 2, 2007.
10 Guideline 15 of the Delisting Guidelines.
11 Guideline 16 of the Delisting Guidelines.
12 As per section 3(o) of the Sick Industrial Companies (Special Provisions) Act, 1985 “sick industrial company” means an industrial company (being a company registered for at least five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth.
13 The proposal is to determine the floor price in terms of regulation 20 of SEBI (Substantial Acquisition of Shares and Takeover) Regulations.
14 US$ 4 approximately. (1 US$= INR 41 approx.)
15 US$ 5 approximately.
16 US$ 3 approximately.
17 US$ 2 approximately.
18 As per guideline 18 of the Delisting Guidelines, relisting of securities is allowed by the stock exchanges after a period of two years from delisting of securities.