Securities and Exchange Board of India (‘SEBI’) vide notification dated June 10 2021 has notified SEBI (Delisting of Equity Shares) Regulations, 2021 (‘Delisting Regulations 2021’) which repeals and supersedes the earlier regulation viz. SEBI (Delisting of Equity Shares) Regulations, 2009 (‘Erstwhile Delisting Regulations’). The Delisting Regulations 2021 have been issued after receiving various feedback and suggestion on the consultation paper issued by SEBI in November 20, 2020.
With many listed companies opting to delist themselves for the various reasons such as reduction in compliances costs, no requirement to adhere to stricter governance provisions and greater flexibility. Since past several years, very few listed companies could actually get themselves delisted as Erstwhile Delisting Regulations were rigid and inflexible. Accordingly, with an objective of streamlining and strengthening the delisting process, Delisting Regulations 2021 is introduced.
The key changes introduced in the Delisting Regulations 2021 vis-à-vis Erstwhile Delisting Regulations are set out as hereunder:
Payment of consideration upon acceptance of discovered price
Erstwhile Delisting Regulations provided for timeline of 10 working days from the date of closure of offer.
The Delisting Regulations 2021 provides for the timeline for payment as under:
− Where the discovered price ≤ floor price or the indicative price – through the secondary market settlement mechanism;
− Where the discovered price > floor price or the indicative price – within 5 working days from the date of disclosure of the outcome of the reverse book building (‘RBB’) process.
Further, acquirer is liable to pay interest at the rate of 10% per annum in case the consideration is not paid within the above time limit.
Escrow Account and deposit of money:
Erstwhile Delisting Regulations provided for acquirer to open escrow account before making public announcement and deposit entire consideration calculated as per the floor price.
The Delisting Regulations 2021 provides for acquirer to deposit an amount equivalent to 25% of the total consideration calculated by applying the floor price or indicative price, whichever is higher, within 7 working days from obtaining shareholders approval and deposit remaining consideration being 75%, before making the detailed public announcement.
- Disclosure of Indicative Price:
The Delisting Regulations 2021 provides for an option to the acquirer to disclose an indicative price which must be higher than the floor price. This option is provided in order to assist investors to gauge the inclination of acquirer to pay a particular price for the acquisition. The acquirer also has an option to increase such indicative price till the commencement of the bidding process.
The Erstwhile Delisting Regulations do not provide for such an option with the acquirer.
- Division of responsibility of a Merchant Banker and issuer of Due Diligence Report:
Erstwhile Delisting Regulations provided for requirement of appointment of a Merchant Banker by board of directors of the listed company for carrying out the due diligence before granting its approval. Further, upon receiving the in-principle approval from the stock exchanges, the acquirer had to appoint a Merchant Banker to act as a Manager to the offer. Manager to the offer could also be a Merchant Banker appointed by board of directors of the listed company.
In order to avoid conflict of interest between Merchant Banker and issuer of Due Diligence Report, Delisting Regulations 2021 provides that the board of directors would be required to appoint a Peer Reviewed Company Secretary, who shall be independent of the promoter/ acquirer / Merchant Banker / or their associates, to carry out the necessary due diligence. Further it provides that the acquirer is required to appoint a Merchant Banker to act as a Manager to the offer before making the initial public announcement.
- Measures to provide exit to remaining public shareholders:
In the Erstwhile Delisting Regulation, once successful delisting is carried out, remaining public shareholders were permitted to tender their shares upto a period of 1 year from the date of delisting. As the obligation was on public shareholders to tender their shares, no timely steps were taken by the acquirer to provide exit opportunity to remaining shareholders.
In the Delisting Regulation 2021, responsibility of the Manager to the offer, in co-ordination with the acquirer, is to ensure that the rights of the remaining public shareholders are protected and in furtherance of the same, shall be required to do following compliance on a quarterly basis during 1 year exit window:
a. publish advertisement inviting the remaining shareholders to avail the exit offer;
b. send follow up communications to the remaining shareholders; and
c. file progress report to the stock exchange, which shall be disseminated to the public, disclosing, (i) number of remaining shareholders at the beginning and end of the quarter; and (ii) details of public shareholders who availed the exit offer.
- Revision in mechanism to counting minimum threshold of 90% for successful delisting offer:
For the purpose of counting minimum threshold (i.e. 90%) for the success of delisting offer, shares held by following shareholders to be excluded from total issued shares of that class-
- inactive shareholders such as vanishing companies, struck off companies, shares transferred to Investor Education and Protection Fund account; or
- a trust set up for implementing an Employee Benefit scheme.
Erstwhile Delisting Regulations did not provide for any such counting mechanism for determining minimum threshold of 90% for successful delisting offer.
- Compulsion for the acquirer to accept the offer:
Erstwhile Delisting Regulations provided that acquirer can refuse the price discovered through a Reverse Book Building (‘RBB’) offer as no compulsion was imposed on the acquirer. The Delisting Regulation 2021 binds the acquirer to accept the offer in a scenario where price discovered through RBB offer is either equal to the floor price or is equal to or less than the indicative price, if any.
- Computation of book value for counter offer:
Erstwhile Delisting Regulation did not provide any mechanism for arriving at the book value. The Delisting Regulation 2021 provides that book value is required to be computed on the basis of both consolidated and standalone financial statements of the company as per the latest quarterly financial results filed by the company with the recognized stock exchange(s) as on the date of public announcement for counter offer. Higher of the values computed as per consolidated and standalone financial statements shall be treated as the book value.
- Initial disclosure to public regarding acquirer’s intention to voluntarily delist the listed company:
Erstwhile Delisting Regulation casted obligation for providing disclosure to stock exchanges / public about the acquirer’s intention to delist the listed company on the board of such listed company upon receiving communication from acquirer.
Under the Delisting Regulation 2021, now an initial public announcement is required to be made to all the concerned stock exchanges by the acquirer on the date when the acquirer decides to voluntarily delist the equity shares of the company and the stock exchange shall forthwith disseminate the same to the public. Copy of such initial public announcement shall also be sent to the company within 1 working day from the date of such initial public announcement.
- Disclosure of due – diligence report and audit report:
Erstwhile Delisting Regulation did not provide for requirement of due – diligence report by the Board of the listed company. Further the audit report was to be submitted to the stock exchange with the application for seeking in-principle approval for delisting.
The Delisting Regulation 2021 provides that the company is required to submit the due-diligence report and the audit report to the concerned stock exchanges and stock exchanges are required to further disseminate the same to the public.
- Constitution of committee of independent directors:
Erstwhile Delisting Regulations required board of the listed company to certify that delisting is in the interest of the shareholders without providing any justifications for the same. The Delisting Regulation 2021 requires board of the listed company to constitute the committee of independent directors for providing reasoned recommendations on the delisting offer and disclosing the voting pattern of the meeting in which the proposal of delisting was discussed. Further, the company is required to publish recommendations of the Committee along with the details of the voting pattern at least 2 working days before the commencement of the bidding period and a copy of the same is also required to be sent to the stock exchange and the Manager to the offer.
- Revised time period for relisting post delisting:
Erstwhile Delisting Regulation provided for time period of 5 years for relisting of delisted company. This time period is now reduced to 3 years under the Delisting Regulation 2021.
- Cooling off period after buyback and preferential allotment:
Delisting Regulation 2021 provides for cooling off period of 6 months from the completion of last buy-back and preferential allotment for the voluntary delisting. In the Erstwhile Delisting Regulation, no such provision of cooling off period had been provided.
- Cooling off period between two delisting attempts:
Delisting Regulation 2021 provides for cooling off period of 6 months between two delisting attempt from the date of disclosure of outcome of RBB process/ public announcement for the failure of the delisting offer/ public announcement for the failure of counter-offer, as the case may be.
In addition to above, Delisting Regulation 2021 also provides for rationalising timelines in relation to the entire process step by step in order to make it timely and smoother.
Further, Delisting Regulation 2021 have also introduced new provisions with respect to delisting of shares of listed subsidiary pursuant to the scheme of arrangement. Detailed provisions in relation to same would be discussed in the next month’s article series.
The Delisting Regulation 2021 are introduced after obtaining feedback / suggestions from the various stakeholders. It addresses various gaps Erstwhile Delisting Regulation contained and also makes the entire process robust and timebound.
For detailed discussion on the above subject, please feel free to connect at contact@devadhaantu.in
