I have in piece with Rashmi Birmole in today's Economic Times on the proposed delisting regulations of SEBI linked here and produced in full below:
In the Indian securities market, successfully delisting a
company is seldom witnessed. The primary reason is the intricate reverse
book-building process, which determines the exit price for shareholders, which
fair in theory ends up being dysfunctional. However, there's a change on the
horizon, as SEBI, the country's market regulator, is working on streamlining
the procedure based on the recommendation by a committee headed by Keki Mistry.
Background
The current mechanism, known as the reverse book-building
process, mandates that during an offer period, public shareholders put forth
their shares. If the shares of the acquirer, following the offer, equate to or
exceed 90% of the entire issued shares, the delisting is considered successful.
If this threshold isn't reached, the delisting bid falls through.
However, the mechanism does allow for a counter-offer by
acquirers, provided they possess a minimum of 90% of the total issued shares.
This threshold can present significant challenges, especially when minority
shareholders have a significant stake, thereby making delisting a herculean
task. While, an extremely high price may sound fair for minority shareholders,
a failed bid at an extremely high price results in no benefit to the minority
shareholders. It also dissuades companies from entering the public markets
which have often been called Hotel California "You can check out any time
you like, but you can never leave."
SEBI's Proposed Changes
Recently, SEBI released a Consultation Paper on 14th
August, aiming to make alterations to this system, making it more adaptive to
the market's evolving dynamics.
1. Counter-Offer Framework
The current requirement has often been a bone of contention,
primarily because it allows majority shareholders to exercise significant
control. The new paper suggests an overhaul by easing these stringent
conditions.
According to the new draft, acquirers can make a
counter-offer even if their stake after the offer doesn't meet the 90%
benchmark. There are conditions, of course. For instance, this can happen if
the discovered price isn't to the acquirer's liking, or if certain conditions
related to bid levels and public shareholding percentages are satisfied.
2. Determination of the Counter-Offer Price
Instead of a rigid structure, SEBI proposes to connect
the counter-offer price to prevailing market dynamics. The price should either
be related to the Volume Weighted Average Price (VWAP) of the tendered shares
or the initially announced floor price. The higher of the two would be the
benchmark. This introduces a level of flexibility, ensuring that the prices are
more aligned with market sentiments and movements.
3. Introduction of 'Adjusted Book Value'
One of the more significant changes is the introduction
of the 'adjusted book value' in the determination of the floor price. This aims
to ensure that the price genuinely echoes the company's real market worth. By
taking into account the fair market value of a company's assets, this new
component ensures that the calculated price is not just a nominal figure but
one deeply rooted in tangible assets.
4. Reference Date Modification
The potential for abnormal trading activities always
looms. To counteract this, SEBI's paper suggests using the date of the very
first public announcement as the reference point for calculating the floor
price. This aims to bring in transparency and tackle the volatility that often
arises between the announcement and the actual trading date during which new extractive
shareholders often enter the arena.
5. Inclusion of a Fixed Price Mechanism
SEBI's proposal to bring in a fixed price mechanism as a
counterpart to the reverse book-building process is indeed a groundbreaking
move. It promises to offer a more definite pricing structure, mitigating
speculative activities in the market. This new option, however, comes with a
stipulation – it will be available only to companies that have a consistent
trading record.
In Summary
SEBI's proposed changes signify a conscious effort to
modernize and simplify the delisting process in India's securities market. The
regulator's intent is clear: reduce undue external influences, such as
dominance by newly arrived shareholders, unpredictable trading activities, and
market unpredictability. This is a commendable step towards ensuring a more
seamless and transparent delisting procedure. Conversely, it can act as a welcome
note for companies seeking public money to IPO by countering the Hotel California
problem, which companies currently face.
Two additional areas which can be considered for
delisting would be make an extremely easy means to getting rid of zombie
companies listed on erstwhile but now defunct exchanges which impose a
substantial regulatory burden. Almost all the companies which have not moved to
NSE/BSE are listed without being alive and waiting for a fair market price exit
would mean theoretically fairness. Listed companies which are infrequently
traded should also have the opportunity to exit at fixed price too, as they are
the best candidates for an exit, having little interest amongst shareholders
and being prime candidates for market mischief.
While the majority of the industry stakeholders have lauded
SEBI's efforts, it's crucial to note that the actual impact and efficiency of
these changes will only become evident once they're implemented. Yet, if
executed well, these changes can herald a new era for the Indian securities
market.
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