I have a piece in today’s Financial Express on the delisting norms introduced by SEBI with Navneeta Shankar and Pragya Garg - it’s a welcome reform, long due which will remove the ‘hotel California’ of Indian markets.
The concept of ‘delisting’ of securities, as the word suggests, allows publicly traded companies to remove their securities from being listed on stock exchanges, either voluntarily or by regulatory mandate. It signifies a company’s transition from being publicly traded to becoming privately held, by providing an exit route to the existing shareholders of the company. While voluntary delisting typically occurs for strategic reasons—such as restructuring or shifting to private ownership—compulsory delisting may be enforced on account of regulatory non-compliance with applicable laws.
While the Securities and Exchange Board of India (SEBI) had put in place an elaborate delisting process by way of the SEBI (Delisting of Equity Shares) Regulations, 2021 (Delisting Regulations), however, instances of delisting in India have been rather uncommon given the cumbersome nature of the process through the reverse book building (RBB) mechanism. The old delisting norms have often left companies trapped, with speculative bidding and artificial inflation of the exit price, hindering their ability to garner sufficient interest from public shareholders and exit the market efficiently.
To address these inefficiencies, SEBI, on September 25, 2024, introduced the SEBI (Delisting of Equity Shares) (Amendment) Regulations, 2024 (Delisting Amendment), following a series of proposals floated in August 2023 and approved in June 2024, marking a pivotal moment in the evolution of the delisting framework. The changes are aimed at reducing friction in the delisting process, offering acquirers more flexibility, and ensuring fair outcomes for shareholders.
Prior to the Delisting Amendment, the exit price for voluntary delisting was determined exclusively through RBB. In this process, the price was set based on bids submitted by shareholders, benchmarked against a floor price or an indicative price. The indicative price is the upfront price declared by the acquirer, which must be higher than the floor price, reflecting the acquirer’s willingness to buy out shares at a specified rate. Since the announcement of a voluntary delisting is usually followed by increased volatility and increased activity in the trading of the company’s scrip given that the exit price was earlier determined by the RBB process, a group of bidders acting together could shoot up the exit price, causing the delisting efforts to collapse. While in theory RBB appears to be a fair and transparent process of determining an exit price (similar to the entry price in IPOs), in reality it is controlled by a handful of speculators who cartelise and ensure failure of delisting, in fact hurting the genuine investor who could have gained an attractive premium had a realistic, though high, clearing price been allowed to be determined.
SEBI has now attempted to remedy this through the Delisting Amendment by providing listed companies with an alternative to delisting through a fixed price mechanism (FPM), apart from the existing RBB method. Under the FPM system, acquirers can set a fixed delisting price at least 15% above the floor price and must accept the equity shares tendered by the public shareholders if the acquirer’s post offer shareholding along with the tendered shares reaches 90% of the issued share capital of that class. As opposed to the RBB method, this mechanism is likely to offer greater transparency and price certainty by eliminating speculative bidding and inflated exit prices which are currently hindering the process of voluntary delisting. It will also reduce volatility and allow the acquirer to arrange funds for the offer in advance, thereby streamlining the delisting process.
The stringent counter-offer conditions under the older delisting norms meant that acquirers could only make a counter-offer in the RBB process if they reached a post-offer shareholding of 90%—a threshold that frequently led to failed delisting attempts. With the Delisting Amendment, SEBI has reduced this requirement to 75%, provided that at least 50% of the public shareholding is tendered. SEBI has also revised the norms concerning the counter offer price, which could not be lower than the book value of the company under the earlier framework. Now, however, the counter price cannot be less than higher of (a) the volume weighted average price of the shares tendered/offered in the RBB process; and (b) indicative price, if any. These revised norms are likely to be more effective in safeguarding the public interest while also increasing the likelihood of successful delisting by allowing the acquirers to negotiate more effectively with shareholders and make a productive counter offer.
Another significant change has been the method of determining the floor price which is no longer required to be computed in the context of an open offer, wherein a company continues to remain listed, as opposed to in voluntary delisting, where a company ceases to remain listed. SEBI now requires companies to use the adjusted book value (ABV) of assets as a key parameter in setting the floor price, ensuring that shareholders receive compensation aligned with the company’s intrinsic value. The floor price will be calculated based on a reference date, which shall now be the date of the initial public announcement and not the date on which the exchanges are notified of the board meeting in which the delisting proposal was considered, as under the older norms. This change mitigates the risk of abnormal trading activity and will align the floor price more accurately with market conditions.
The new delisting norms also introduce a concrete framework for delisting of an Investment Holding Company (IHC). An IHC is a company holding investments in listed or unlisted companies or holding assets other than such investments. Since there existed no separate framework for delisting of IHCs, this led to the equity shares of a listed IHC being traded at a discount compared to the true value of its investments in listed and unlisted companies. Consequently, the floor price set under Delisting Regulations more often than not did not reflect the true intrinsic value of these investments.
With the Delisting Amendment, IHCs now have an alternate delisting route, allowing them to transfer shares of underlying listed companies to public shareholders proportionally after cash payments for unlisted investments and other assets. This will be followed by a scheme of selective capital reduction to extinguish the public shareholding in the IHCs in terms of the provisions of the Companies Act, 2013. However, only IHCs with at least 75% of their fair value in direct investments in listed companies can avail this alternative, potentially leading to more voluntary delisting offers from such IHCs.
SEBI’s newly implemented delisting reforms mark a transformative step towards resolving the long-standing challenges in India’s capital markets. These changes are likely to encourage smoother transactions and enhance the efficiency of market exits without compromising investor interests. The improved predictability of the delisting process will inspire confidence among both promoters and investors, balancing ease of exit with protection for minority shareholders. Counter-intuitively, easier delisting can also foster more IPOs by reassuring companies that exiting the market, when necessary, will not be overly cumbersome or costly. With these reforms, SEBI has aligned India’s delisting norms with global standards, paving the way for a more robust, efficient, and balanced market conditions.
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