I have a piece in today's Economic Times on the need to eliminate 80% of all regulatory laws and how precision and brevity are important in designing law, specially law which is easy to pass without parliamentary approval. Below is the full piece:
It’s a Doge eat regulation world
Regulators think of introducing new regulations from two lenses. First in terms of errors. Whether the law will harm innocents or let the guilty get away. Second, in terms of cost-benefit analysis because every law has a cost on the market. In addition, for good process, they look at views of expert committees and exposing draft regulations to public comments.
Students of criminology (with its origin in logic and later statistics) will immediately recognize the two error types. Type I error occurs when a guilty person escapes because the law is too lax. This error prioritizes protecting the innocent at the risk of letting some guilty individuals go free. Type II error occurs when an innocent person is found guilty. This reflects an overly stringent or biased system that compromises individual rights and undermines justice.
Sadly, a lot of current regulations falls within these errors. In fact, the SEBI law against fraud is drafted so sloppily that it simultaneously creates both type I and type II errors at the same time. While it is easy to blame SEBI, many of these laws were created by market experts from the industry. The law against fraud, the law against insider trading and the takeover law are the most egregious examples (and also the cornerstone of securities laws).
Let’s take the example of the securities law against fraud. Fraud has been well understood for centuries under common law, even before a formal legislation came in. Based on the common law, five ingredients were identified: intent, materiality, mis-statement, causation and harm. These ingredients with minor modifications for the anonymous securities markets have created the US rule against fraud commonly called rule 10b-5 never modified since its introduction in 1942. There are now tens of thousands of US court rulings chiseling each of the requirements of the ingredients. That’s how the law becomes more sophisticated and nuanced.
Take the Indian law now, in what is called the Fraudulent and Unfair Trade Practices regulations of SEBI or FUTP. None of the five ingredients are required to prove fraud. I had written an article in this paper in Sept 2018 that under securities law I can prove that walking, running and swimming were all fraud. These kind of laws may sound fair to a layman, but if you put a lot of random people in jail for murder, likely-some-will-be- murderers kind of logic is not really a good way to draft law and puts the common law system of ‘innocent till proven guilty on its head’. Yes, it indeed makes the task of the prosecutor easy to put everyone they see in jail.
The other, somewhat related problem is prolixity. We love to write laws. With a lot of words. It may not make any qualitative difference in liberal arts subjects whether you describe an object with a thousand words or ten thousand. However, law is more akin to STEM subjects. At the cost of sounding pompous, I would go so far as to say, it is akin to surgery. Every single comma is like a millimeter while conducting surgery. Ask the insurers how the 9/11 insurance contract was drafted and whether the ‘event’ included two plane attacks or one, decided whether they paid an extra 3.5 billion dollars or not. With laws, the consequences can be alarmingly more serious than with drafting contracts.
Let’s just start with one comparison and two examples from the same domain of fraud and insider trading laws in the securities markets. First, the anti-fraud rule in the US has 124 words. The insider trading law has 0 additional words as it is subsumed in the anti-fraud Rule. The Indian equivalent FUTP has over 4,400 words and the insider trading regulation has over 20,000 words. These additional 24,000 words are not just surplusage, but cause harm to innocent people, and let the guilty free. And no, we didn’t try to create a better definition, Regulation 3 of FUTP is a virtual lift off of the US rule. We just chose to write another 24,000 words and stuck a long tail on what matters.
Just look at one example where the Supreme Court had to intervene in a case where a person who had good news sold in the markets and was accused of insider trading. In its argument, SEBI relied on the fact that the regulation does not mention the direction of trading and thus the person will be found guilty. Even a high school student will note the absurdity of this argument, buying while holding unpublished bad news or selling while in possession of good news is irrefutable proof that insider trading did not happen.
Even worse is the deeming provisions of these laws. For example, if a woman were to share the closure of a large M&A deal with her husband for going out on a celebratory dinner is a criminal according to SEBI laws on ‘need to know’ basis of sharing information even where no mis-use of the information occurs. The deeming provisions of insiders would deem almost any semi-random communication with any other person as refutable proof that the person illegally passed on information. If I were to give a legal opinion to a company on matters of intellectual property, and bought a few thousand shares contemporaneously, there could be a deemed provision that the company passed on illegal information (say quarterly earning) to me. The only way I will be able to disprove it would be for me to record every conversation had with company officials, and if I were to meet them, put a GoPro camera on my head while having dinner with them. The insider trading laws require no element of being an insider, no need to show trades and even no need to show any inside information. There is a need to take Elon’s scalpel, and cut down regulations and the overly broad laws. By my estimate, the existing laws of SEBI and other regulators could easily be improved by cutting them by 80% and bringing in precision. And we could see a real ease of doing business in India for public companies.
The author’s book Fraud, Manipulation and Insider Trading in the Indian Securities Markets fourth edition will be published by LexisNexis next month.
Introducing the first episode of ‘Decoding with Finsec’ on Youtube. We dive into the key proposals which were greenlit by the Securities and Exchange Board of India (SEBI) on 18th December 2024.
From stricter norms for SME IPOs to classifying material events as unpublished price sensitive information (UPSI) under the insider trading regime, join us as we dissect the recent changes and explore whether these reforms are geared towards enhancing the ease of doing business for market participants or designed to ease SEBI’s regulatory responsibilities. __________________________________________________________ Time Stamps: 0:00 - Introduction 1:21 - Stricter norms for SME IPOs 8:36 - Permitted activities by merchant bankers 17:36 - Agency for verification of past returns 22:31 - Events deemed as 'unpublished price sensitive information' 29:41 - Draft PUSTA Regulations 31:31 - Skin in the game by AMC employees
I have a piece with Parker Karia and Pragya Garg on the future of algo trading and its regulations in today's opinion page of Financial Express. Please see below the full piece:
"Among the flurry of consultation
papers issued by the securities market regulator over the past few months, in
December 2024. SEBI proposed significant changes to its framework governing
algo trading. To recap quickly, algorithmic trading, or algo trading, refers to
any trading activity that automates trades, and does not require manual
intervention to place any orders, or monitor prices.
There are two ways in which one can
carry out algo trading. The straightforward method is to use the algorithms
provided by the stock broker, if that is a facility your broker provides. The
other route is through APIs (Application Programme Interface), which enable
electronic systems to connect with each other.
Think of it as a data pipe which
carries your algorithm. APIs enable the transmission of information, and as a
result, a third party can create a code that will execute itself on the
broker’s platform. APIs are what enables you to book an Air India flight on
Goibibo or avail a loan from a bank through a distributor.
In the context of algo trading,
third parties provide their algo on say, Platform X, which is connected to the
broker’s platform through an API. Thus, orders placed by the client on Platform
X get passed on to the broker. Now, while a broker can identify that an order
is coming in through an API, it cannot verify that the order is an algo order.
In 2021, being concerned with the
rise of unregulated and unapproved algos, SEBI had proposed to treat all API
orders as algo orders. This was a flawed approach, and a departure from SEBI’s mission
to encourage innovative and digital solutions in securities market, as the
regulator’s proposal would have retarded connectivity between brokers and other
sophisticated players connecting to them for non-algo purposes.
It appears that the proposal has
been scrapped, and after extensive consultations with the industry, a more
practical approach has been proposed.
With respect to API orders, SEBI
has suggested that an ‘Order per second’ threshold be specified, and
that all API orders above such threshold would be treated as algo orders.
Secondly, SEBI has proposed to
bring ‘algo providers’ within the regulatory ambit. These algo providers
would be agents of stockbrokers, similar to the present ‘Authorised Person’ or
the erstwhile sub-broker concept. Algo providers would also have to register
with the stock exchange, and also get their algos approved by the exchange.
This would ensure that the broker is responsible for customer grievances, and
the redressal mechanism deployed by SEBI would be available to clients of algo
providers.
Individuals who design their own
algos would also have to get them approved by the stock exchanges through their
broker. These can then be used by the investor’s immediate family as well.
The regulator has also sought to categorise
algos into ‘White Box’ and ‘Black Box’ algos. White Box algos,
also known as ‘Execution Algos’, are those which execute orders based on fully
transparent algorithms, where the logic, decision making processes and
underlying rules are accessible and understandable to users and is replicable.
On the other hand, Black Box algos are algos whose logic is not known to the
user and is not replicable, or where the user cannot see the internal workings
and rationale of the algo. For providing Black Box algos, one would be required
to register as a research analyst, and for each algo, a research report would
have to be maintained, and in case of any change in the logic governing such
algo, it would have to be registered afresh, along with a new research report.
The
proposed framework places significant responsibilities on stock brokers.
Brokers would have to put in place systems and procedures to detect, identify
and categorize all orders above the specified ‘order per second’
threshold as algo orders. They would also have to make sure to have the ability
to distinguish between algo and non-algo orders. Further, brokers would no
longer be permitted to offer open APIs, to ensure identification and
traceability of the vendor and end user. Whether such severe restrictions are
required or not, in view of the measures such as the ‘order per second’
threshold, may require some more thought. APIs have uses beyond algo trading.
The proposed circular should not stand in the way of such non-algo trading use
case scenarios.
There
is a fair bit of work that the stock exchanges would also have to do. First,
they have to define the roles and responsibilities of brokers and empanelled
vendors, and lay down the criteria and process of empanelment of vendors. A
turn-around-time has to be specified for registration of algos, including a
fast-track registration for certain algos, such as White Box algos.
Further,
the stock exchanges would have to deploy additional resources as well. The
exchanges would be required to conduct post trade monitoring of algo orders and
trades and put in place a Standard Operating Procedure for testing of algos.
Further, they must have the ability to use a ‘kill switch’ to stop
malfunctioning algos.
Additionally,
they would have to supervise/inspect that stockbrokers have the ability to
distinguish between algo and non-algo orders, and issue detailed operational
modalities, regarding the roles and responsibilities of stock brokers and algo
providers including risk management system of stockbrokers for API orders.
The present proposal thus seems to
be more carefully thought out, and seeks to adopt an approach that strikes a
balance between the interests of the stakeholders and concerns of the
regulator. In another positive move, in its last board meeting of 2024, SEBI’s
board granted approval for the
recognition of a ‘Past Risk and Return Verification Agency’ (PaRRVA),
which shall carry out the verification of risk-return metrics inter alia
in relation to algo trading.
There are still some points which
may require a re-think as algo trading picks up. For instance, SEBI’s earlier
question of whether an algo should be a facility provided by a research analyst
or an investment adviser, or a separate class of regulated entities altogether.
With the proliferation of AI, the roles, responsibilities, risks and
liabilities are getting redefined.
However,
there are few items that may require consideration soon, if not now. For
instance, algos may be designed by artificial intelligence. The risks and
liabilities that may arise out of such instances must also be deliberated upon
carefully, along with the roles and responsibilities of the elements involved.
While there may never be one right answer, and regulation of something as
innovative as algo or AI based algos is bound to create some unnecessary
bureaucracy in the process, it is important for the regulator to at least have
some grip on something which could have systemic impact on the markets."
Today's Financial Express has a piece by @_baldemort__ @JRishabh2001 and me on the proposed expansion of the definition of what would constitute material under a relook at the listing regulations, to make them more in line with the definition of material in the insider trading regulations. While broadly ok, there are certain areas of caution. For instance pre-mature disclosure will chill forensic audit, because no company would like to attract negative attention till the forensic report actually finds wrong-doing. That would be a regulatory self-goal. The full piece is copied below:
The Securities and Exchange
Board of India (“SEBI”) released a consultation paper on November 9,
2024 proposing
revisions to the definition of Unpublished Price Sensitive Information (“UPSI”)
under the SEBI (Prohibition of Insider Trading) Regulations, 2015 (“PIT
Regulations”). To this effect, SEBI has introduced thirteen (13) new
proposals to broaden the scope of the UPSI definition to include certain
material events specified under the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 (“LODR Regulations”). These include,
among others, upward or downward revisions of credit ratings, proposed
fund-raising activities to be discussed at Board meetings, agreements impacting
the management and control of the company, initiation of forensic audits,
outcomes of certain litigations, and the award or termination of significant
contracts or orders not in the ordinary course of business. Some additions are
well-founded, as such events significantly influence investor decisions and
market movements. However, certain inclusions may dilute the framework's
purpose by covering routine operational matters or classifying less material
disputes as UPSI.
The relationship between
material events and UPSI has evolved over time. Initially, the definition of
UPSI under the PIT Regulations included within its scope, information related
to all material events as per the listing agreement. However, an amendment to
the PIT Regulations in April 2019 removed the direct link to materiality.
Instead, listed entities were required to exercise judgment and prudently
classify information as UPSI to align with the intent of the PIT Regulations. Despite
this, instances of failing to categorize information, apart from those
explicitly specified under the PIT Regulations, continued to persist. SEBI
noted that listed companies were not exercising due care to classify or
consider certain price sensitive information as UPSI. To address this issue,
SEBI released a consultation paper on May 18, 2023, proposing to align the
definition of UPSI with material events under Regulation 30 of the LODR to
improve clarity and ensure consistent compliance.
In its latest consultation paper
released on November 9, 2024, SEBI aims to address concerns raised in public
feedback regarding the proposal to include material events under Regulation 30
of the LODR Regulations within the definition of UPSI. These include concerns
over the limited impact of all Regulation 30 events on securities prices,
recommendations to prioritize specific material events, and difficulties in
compliance management. In this context, determining whether a material event falls
within the scope of UPSI requires evaluating whether events warranting
disclosure are, in most cases, also price-sensitive.
The new proposals recommend
including regulatory actions against the listed entity, its directors, key
managerial personnel (“KMPs”), and subsidiaries within the definition of
UPSI. However, not all regulatory actions or orders carry the same level of
significance or are likely to impact prices. For example, regulatory actions
such as notices resulting in minor penalties for technical defaults are
unlikely to have a substantial effect on stock prices. Similarly, actions
against non-material subsidiaries that are not directly involved in the listed
entity’s core and major operations may not significantly alter market
perception. More importantly, even if material, ‘action initiated’ should never
be the standard for disclosure. Everyone is assumed innocent unless proven
guilty. To put in public domain a very preliminary charge or prima facie case
would be unfair to the individual or company being investigated, ruining their image,
even if ultimately exonerated. The only acceptable standard must be when a
person is indeed found to have committed a wrong.
The Consultation Paper also
proposes including changes to KMPs within the UPSI definition, even in cases
unrelated to governance concerns, disputes, or financial irregularities. Additionally,
it suggests incorporating information about the outcomes of litigation or
disputes that could impact the listed entity. While rulings that result in
significant financial liability may affect stock prices, outcomes that are
pre-disclosed or anticipated, where the market has already priced in the
potential impact, may not always be price-sensitive. As a result, events
covered under Regulation 30 of the LODR Regulations require further independent
analysis of their price sensitivity to determine whether they should be
included within the scope of UPSI.
However, proposals for
information such as upward or downward changes in ratings are inherently
price-sensitive, as they directly affect the perception of a company’s
creditworthiness or risk profile and are closely monitored by investors. Similarly,
including award or termination of order/contracts not in the ‘normal course
of business’ is justified because both the award and termination of
contracts outside the normal course of business often indicate significant
changes to the company's future cash flows, market position, or operational
strategy. These events could lead to price movements. Of course, a material
filter should also be applied, as a Re. 1 outside normal course of business
contract should not be required to be disclosed.
The proposal to include
information in relation to initiation of forensic audit or receipt of final
forensic audit may raise speculations about potential mis-statements, misappropriations,
or irregularities in a company’s financial dealings is too pre-mature. Indeed,
if at the preliminary stage this is required to be disclosed, few companies
would initiate a forensic audit for the fear of bad press. Indeed, the company
would get bad press if and when a finding of mis-statement is found by the
forensic report. Mandating a disclosure pre-maturely would be a regulatory
self-goal.
At
this juncture, it is important to note that the definition of UPSI is intended
to be inclusive, already covering disclosures under the LODR Regulations that
may be price-sensitive. The current proposals reflect SEBI's intention to
better align its regulations with the realities of market dynamics. By
broadening the definition of UPSI to include material events required to be
disclosed under Regulation 30 of the LODR, SEBI acknowledges that certain
events, even if they are not inherently market-sensitive at first glance, could
have significant implications for investor perception and are not currently
being disclosed. As a free market supporter, the authors believe in the current
approach, but SEBI may be right in changing standards if it has data that
people are being too cute with disclosures.
Through
this approach, SEBI seeks to capture a wider range of corporate actions and
events that could influence the financial standing or public perception of a
listed entity. However, this broad interpretation introduces complexity, as it
may lead to the classification of at least some routine operational events as
UPSI, even if their market impact is limited or uncertain. Similarly, some
other concerns with respect to forensic audits and under investigation or under
enforcement events should not be disclosed till a finding of fault.
SEBI's
proposed revisions to the UPSI definition aim to address changing market
conditions and improve investor protection. Expanding the scope to include more
material events under the LODR Regulations helps with clarity and compliance.
However, it also creates challenges in distinguishing between price-sensitive
information and routine operational matters. A consistent and focused approach,
based on the likelihood of an event affecting market prices, reducing adverse
impact on innocents and preventing self-audits by pre-mature disclosure would
ensure that only truly relevant disclosures are classified as UPSI. This
approach would help maintain the effectiveness of the insider trading
regulations, reduce unnecessary compliance burdens while aligning the rules
with current market practices.
Rashmi Birmole, Pranjal Kinjawadekar and I have a piece in the Financial Express of 30th Nov 2024 on the new structured digital platforms to regulate unregulated influencers being associated with registered SEBI intermediaries. The full piece is as below:
The regulation of finfluencers has been a subject of
debate long before any attempts to bring them within the regulatory fold. Designing
a framework to address the spread of unauthorized advice or misleading claims
to an impressionable audience has had its own challenges, especially given the
absence of fiduciary duties and a code of conduct. While such activities could
be penalized as fraudulent practices or unregistered advisory, given the scale
of misinformation and justifiable risks surrounding investor protection and
financial stability, there was a growing need to also consider pre-emptive
solutions.
To that end, in August 2023, SEBI proposed to limit
the association of regulated entities with unregistered persons, like
finfluencers, in a bid to disrupt their revenue model. The proposals culminated
in amendments to certain key regulations on August 26, 2024, that barred
regulated entities from associating with persons who provide advice,
recommendations or performance claims, without being registered to do so by
SEBI. However, such associations were allowed if carried out through a ‘Specified
Digital Platforms’ (SDPs) recognized as such as SEBI, based on whether the
specified preventive and curative measures could be demonstrated by such
platforms. This was also followed by a directive to regulated entities to
terminate all existing contracts with individuals providing unregistered advice
or making performance claims.
On October 22, 2024, SEBI released proposed measures
based on which digital platforms would be recognized as SDPs. Digital platforms
have also been broadly defined to encompass any platform that facilitates communication
between two or more individuals and allows user-generated content.
The criteria released by SEBI can be seen as two-fold
– preventative and curative. Preventative measures are envisaged as proactive
actions to prevent fraud, impersonation, unauthorized claims and presence of
unregistered entities. Several of these measures, such as implementation of
systems to identify and analyze content related to securities (including
advanced artificial intelligence (AI) and machine learning (ML) tools),
policies to take action against securities market violations and impersonation,
allowing investor education content and use of verified labels to distinguish
registered entities seem premised on creating a digital ecosystem that is
well-equipped to identify and filter out unauthorized advice, claims or
advertisements. However, what is truly striking, even upon a first reading of
the proposals, is the breadth of power given to SEBI on multiple levels.
Whether in terms of requiring an SDP to share securities-market related data on
request, act on inputs received from SEBI, take measures to the satisfaction of
SEBI and even periodically report to SEBI, in a manner akin to regulated
entities.
Curative measures,
on the other hand, are intended to address the gaps in preventive measures. The
requirement for prompt escalation of reports regarding unlawful content and
unauthorized entities by SEBI, regulated entities and users alike, is intended
to restore confidence and enable prompt identification of such content. The
SDPs would also be bound to act on such reported content within strict
turnaround times, which may also include takedown or blocking of content and
blacklisting of repeat offenders. Interestingly, the action that a platform
takes should be to SEBI’s satisfaction. This leaves little to no room for the
platform to arrive at objective conclusions based on its own verification and
is essentially a carve-out for SEBI to direct content to be blocked or taken
down, without further scrutiny.
Considering the growing
influence of social media and influencers in today’s day and age, it is evident
that the prospect of being recognised as an SDP would appeal to a number of
digital platforms. While the implications of SEBI’s extensive powers under the
SDP proposals on free speech and the legality of creating substantive
obligations through a circular warrant a separate conversation of its own,
digital platforms considering recognition as SDPs must be cognizant of the extent
of SEBI’s potential involvement in their activities, if they were to succeed.
Moreover, given that SEBI’s decision as to whether certain content qualifies as
‘advice’ or ‘performance claims’ is likely to be the end all, with platforms
bound to take action to its satisfaction, it is possible that legitimate
conduct may also be impacted, unless stronger controls are worked into the
framework.
The proposals also
call for platforms to implement policies for providing data upon request, thus
increasing SEBI’s oversight of financial activities in digital media. However,
the lack of clarity on the specific data to be shared may create compliance
challenges, particularly in respect of end-to-end encrypted data, which may
deter them from seeking recognition. Further, the costs of integrating advance AI
systems could potentially deter new entrants and smaller platforms. Automated
systems may also unintentionally flag legitimate content as violative,
resulting in unwarranted disruptions. This risk extends to lawful content or
advertisements being mistakenly identified as violations, which is precipitated
by the absence of any redressal mechanism apart from approaching SEBI.
When compared to international practices, SEBI’s approach
seems to be comparatively more intrusive and wider. The Financial Conduct
Authority (FCA) in the United Kingdom employs a collaborative model,
integrating its oversight with existing digital regulations rather than
introducing standalone frameworks for financial content. The FCA partners with
Ofcom under the Online Safety Act, emphasizing shared responsibility for online
platforms while avoiding the role of a direct regulator. Similarly, in
Australia, the Australian Securities and Investments Commission (ASIC) has partnered
with online platforms to enforce verification processes for financial services
advertisements. This collaboration reduces fraudulent promotions while
minimizing compliance burdens on digital platforms. For instance, Google now
mandates that financial services providers verify their Australian Financial
Services licenses, issued by ASIC, before advertising. Providers must also
complete Google’s advertiser verification program, a policy aimed at curbing
financial fraud through online advertising.
While SEBI’s initiative to regulate digital platforms
is a welcome step towards addressing the proliferation of unregistered
financial advice, the framework’s stringent requirements raise several
practical and legal concerns. Ultimately, the SDP proposals represent a
significant shift in its regulatory strategy, signaling a move towards tighter
control and attempting to bring platforms that fall outside SEBI’s
jurisdiction, within its regulatory ambit by reason of having facilitated the
publishing and availability of financial content. The new norms must face three
challenges. One, of how it acts within the framework of freedom of speech,
specially in borderline cases. Two, whether the regulator has the bandwidth to administer
such a large mass of the regulatory unwashed masses and whether this SEBI-Administered
Facebook (SAF) will have any takers. Third and most importantly, whether any of
the millions of people with views and youtubers would at all want to be on a
platform where the SEBI-Suaron’s eye is ever-watching. How these proposals
unfold in response to the financial sector and social media platforms alike
remain to be seen.
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.
