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Review Of Delisting Regulations!

Published on Sat, Jun 14,2014 | 13:16, Updated at Wed, Jun 18 at 23:00Source : CNBC-TV18 |   Watch Video :

Five years and only 38 delisting offers. Is going private in India too cumbersome? Well, Securities and Exchange Board of India (SEBI) seems to think so and in a review of its 2009 delisting regulations SEBI has suggested changes to rework the pricing mechanism, improve shareholder participation and reduce process time. Will these changes make delisting any easier or will they put minority shareholders at a disadvantage?

In 2009, SEBI ushered in a new delisting regime with tweaks to the Reverse Book Building price mechanism and new success or acceptance thresholds. Since then just 38 offers have hit the market, 9 of which failed mostly due to inadequate response from shareholders. Of the 29 successful offers in seven the exit price was determined at more than 100 percent premium to the floor price. In five there was no premium offered at all.

2009 Rules

Price Mechanism: Reverse book building
Successful Delisting: Higher of 50% of public shareholding or 90% promoter holding


Total Delisting Offers: 38
Failed Offers: 9
Successful Offers: 29
                                 - 7 Offers: Premium of more than 100% to floor price    
                                 - 5 Offers: No premium offered

What’s wrong with India’s de-listing regulations and how can they be fixed. To discuss that I have with me Sourav Mallik, Senior ED & Head - M&A, Kotak Investment Banking; Sandeep Parekh, Founder, Finsec Law Advisors & JN Gupta, Founder & MD, Stakeholders Empowerment Services

Doshi: Only 38 offers in five years. Would you say that is because companies do not want to delist, they love being listed in India or would you instead say that it is the process that is so cumbersome that even at a time where share prices were low and it would have been an opportune time for companies to go private, we have seen only 38 offers. Does that mean that delisting regulations in India have failed?

Parekh: That will depend how you define failed but I would say that it is quite expensive to delist and the statistics are there in the SEBI paper- the average is around 65 to 70 percent premium on the market price. With 25 percent shares in public hands- that could amount to a lot of money which the promoters may not be able to shell out.

Doshi: Is it only because of expense or is it simply too laborious and there is no promise of success at the end?

Mallik: It is a combination of all of these, but if you really think about it, the first thing is that there have only been 38 attempts to delist a company. That itself shows that companies, promoters and shareholders believe that it is not an easy process or a process that you can really get into. Nobody likes a failed transaction. So they would like to enter into a transaction only when they have a reasonable visibility on whether it is going to be successful or not and it does create certain challenges which results in difficulties in terms of the process and it becoming more expensive than what it ideally in a balanced scenario should be and that is probably what has lead to lesser number of delisting.

Doshi: Wouldn’t you say that it is also disadvantageous for the shareholders if a company that wants to go private is forced to stay listed, because it clearly then is staying listed simply because it cannot go through the process or the process of going private is way too laborious. So whilst on the one hand the shareholders maybe happy that fewer companies are delisting you also have to realise that by forcing a company to stay listed you are unlikely to gain much?

Gupta: The process is simply that today the present legislation is such that it gives lot of power to either side- whether it is shareholders- they are in a position they can spoil any delisting process by having very small amount of shares but if they start quoting a very high premium for the delisting the delisting fails unless the promoter is ready to shell out. As a result of this what is happening, there are some other ways or means adopted by the promoters. So in sum and substance today the present delisting process is very cumbersome, very difficult; it gives unequal power to either side.

Currently the delisting price is determined by a Reverse Book Building process in which the price that garners the maximum bids becomes the offer price. This has often lead to high premiums being demanded by a small group of shareholders and as SEBI points out also runs the risk of domination by a majority of the minority. And so SEBI’s Primary Market Advisory Committee (PMAC) has offered three options for change.

2009 Rules

Price Discovery
-    By reverse book building
-    Offer Price: Price at which maximum bids made
-    Demand of high premium
-    Domination by a majority of the minority

Option 1: Keep the Reverse Book Building process but fix the exit price as the price at which, say 90 percent or a requisite number of shareholders, have tendered their shares. To deal with fears of a possible tacit understanding between the promoter and a set of public shareholders, the PMAC suggests fixing thresholds for minimum number of shareholders or minimum number of shares to determine the offers success.
Price Discovery: Option 1

Reverse book building with a twist
- Exit Price: Price at which requisite number of shareholders tender shares
- Successful Delisting: Determined by minimum number of shareholders
                                   Or minimum number of shares held & not traded for 1 year

Option 2: Keep the Reverse Book Building process but if the discovered price is too high, then allow the promoter to make a counter offer. If accepted, by say 90 percent shareholders or any other such number then the offer is a success.

Price Discovery: Option 2

Reverse book building with a twist
- Acquirer can make counter offer if discovered price too high
- Successful Delisting: Acceptance by 90% shareholders

Option 3: Go back to the fixed price process that is offer a fixed premium to the floor price or a fair price determined by merchant bankers.

Price Discovery: Option 3

Do away with reverse book building; introduce fixed price

Exit Price: Premium to floor price
                  Or fair price determined by merchant bankers             

Mallik: The key issue here is that if you think about it we have to finally find a balance between the acquirer and the shareholder. You had the old regime -pre 2003 -where it was kind of tilted in favour of the company.

Doshi: Because it was fixed price?

Mallik: Yes, it was a fixed price regime. On the other side you then had a regime from 2003 to 2014 where you had Reverse Book Building with a whole host of other conditions. Looking at both regimes, it is fair to say that you can’t go away from Reverse Book Building as a basic concept. So among the three, the one that I tilt towards the most and there are a few more refinements I want to do ideally on that is the counter offer mechanism. So you have a Reverse Book Building which throws up a certain demand chart. Then you have the acquirer who says, okay this is the demand chart, I am taking an informed call that this is what the investors are saying. Fine, based on this, and based on my economics nobody can force me to, this is the maximum that I can pay. Based on that if we have enough people walking through the door at that price we should allow the company to get delisted. Second is allow retail shareholders to understand that yes, this is a fixed price. Give them a separate additional window which is the counter offer window to allow them to come in. They don’t understand the Reverse Book Building, they don’t have to. We can’t go and start explaining that to them but the Reverse Book Building and counter offer now will throw up a price. Allow the retail shareholders to come in at that price by saying that, okay I am willing to come in at the cut off price or once they know the price they are able to come in.

Doshi: Would you agree that this is probably the best way to serve the interests of both sides?

Gupta: Unfortunately I do not agree with the Reverse Book Building process mechanism and I don’t even believe in the Initial Public Offering (IPO) process for the simple reason that any institute of economics says that the fair price discovery happens only when there is a free market perfect competition. Here you create a situation where there is no situation of ability to discover the fair price because the supply is limited, the people are limited and everything. A fair fixed price is an option. The problem in our country is that you appoint a valuer, the valuer sides with the management, the valuer sides with the company.

Doshi: How can you appoint a valuer to give you a valuation of a company that is already trading in the marketplace whose discovered price is already evident there? That is the value at which investors think this company should trade at. So how can a valuation report say anything different?

Gupta: The discovered price is of an ongoing listed entity. When you have to take the outstanding share back and you have to delist it, there you have to pay premium for it and that premium has to be decided by some method. I do not disagree that it is a difficult thing.

Mallik: Having looked at everything, between the two, basically what we are trying to say is that the valuer should estimate the value at which somebody should give up his rights to participate in the future growth of the company.

Doshi: How is he going to do that?

Mallick: It is very difficult.

Doshi: It is impossible. What is your suggestion on this?

Parekh: I have a third view happily and before I get into my view the important thing here is to look at optics. Even though in practice it has worked out quite unfairly I don’t see SEBI as a regulator abolishing book building. I just don’t see it. So it will stay, whether you like, whether I like it, or we don’t like it, it is going to stay. That is my prediction. My view is we should adopt a Dutch Auction System, which is the first option. Essentially you come to a price where your book fills up which as some of your economists viewers would know there are two types of auction systems, one is called Walrasian auction which means the way the National Stock Exchange (NSE) and Bombay Stock Exchange BSE open- you aggregate all the orders together and whichever price creates the most volume is the opening price which is what is happening here. As opposed to that you can have a Dutch auction in which the book keeps filling up and you will see whatever price at which you cross the 90 percent would be the price which is acceptable.

Mallik: In fact that is actually the suggestion in the current changes. They have suggested that you take away the model price, that was an inefficiency definitely which was brought in through the regulation which allowed some people if they collude, come together, create a price which is different from the clearing 90 percent price and create an artificial model price. So taking away the model price is a very good step. It is an improvement. Taking away the model price absolutely fine, should be done, should go ahead. All I am saying is that it should be implemented along with the counter offer process.

Parekh: You can combine the Dutch auction with the counter offer.

Besides pricing the second issue that has plagued delisting offers is the lack of sufficient participation and the committee has identified four potential changes. First, to ensure that all the shares are available for tendering, the committee has proposed that trading activity in the shares be restricted for a couple of days before the closure of the Reverse Book Building process. Second, allow depository receipt holders to also participate in the tendering process but only if all the beneficiary owners are known. Third, in order to simplify the process for retail investors they should be allowed to bid at the cut off price determined by Reverse Book Building or any other suitable formulae and fourth, since a tender offer is off exchange it attracts higher capital gains tax. So the committee suggests that shares offered for delisting should be tendered on the exchange platform.

Low Demand: Proposal

Restrict trading activity to make shares available for tendering
Depository Holders’ participation
Allow retail investors to bid at cut-off price (RBB/formula based)
Tendering of shares on Exchange for low tax incidence

Mallik: Stopping trading during the Reverse Book Building and the counter offer period is an excellent suggestion.

Doshi: For that you have to reduce the time period, because you can’t have suspension of trading for ten days, five days etc; you have to do it for a day or two, right?

Mallik: These are exceptional circumstances. I will give you an example. There is a delisting that we attempted earlier last year. The last day the scenario is that there are certain market participants who have garnered shares who have come to the collective conclusion that this delisting is not going to go through. The price is held artificially high but this impression is kept within themselves because the success of the delisting depends on them completely. They have decided that we are not going to tender in the delisting offer but the word spread through the market is that this delisting offer is going to be successful. People come in there, they buy the shares and with the hope of exiting in the exit window making a certain arbitrage. By the end of the last day the stock is at the downward circuit because all of these arbitragers have dumped the stock and have exited leaving the retail shareholders high and dry because they have a stock which they have bought at a price which is anticipating a delisting premium and you now have a situation where the stock is completely down below.

Doshi: So you agree with the restriction on trading?

Gupta: I will tell you why, and the reason is today the window is that even after delisting is successful you can sell the share for one more year. So they say, today it is Rs 100, but delisting price will be Rs 200. So they keep on buying in the hope that they will at least have one year window of the stock as they could not participate in the delisting process and they’ll be able to sell and that is where the problem occurs.

Parekh: They are parallel markets of different needs; you can’t kill one market because it serves the purpose of another market. You can’t fight economics.

Doshi: But if a company is expressing its desire to delist and go private, you are not killing a market; you are suspending it for a few days.

Parekh: But for those two days you are stopping activity in that market. If I want to exit a company I cannot do it on two days, you are doing a disservice to me.

Doshi: No, but you will only suspend that after having given adequate notice. So shareholders know that within a month this company wants to delist and at the end of this month this stock will stop trading for two days, and if I want to exit I have to exit before that.

Parekh: But why do you want to disrupt a market, it is not necessary.

Mallik: We used to have the practice which was called no delivery period etc. Even if we implement that, to some extent you might achieve what is required.

Parekh: Let me give you a counter argument. The paper says it takes 134 days to delist. So aren’t people already aware, is somebody going to be so foolish that they are going to wait. Are they going to trade two days in advance and the stocks are going to be blocked in the system.

Doshi: But he has just given you an example of how people are doing it.

Gupta: What happens is the price is ramped up giving an impression that the exit price announced is Rs 100 but it is going to be Rs 200 to Rs 250. If I am an investor and if the stock is trading for Rs 130 I would say let me buy it although in the delisting I will not be able to put it in the delisting process but since one year window is there I will be able to exit at Rs 240.

Parekh: You are victim of your greed. I don’t think that by killing the market you are going to solve this.

Doshi: You are not just a victim of your greed; you are also hurting the delisting process, you are stopping the process.

Parekh: You may be but by stopping the market you are not solving that.

Doshi: Okay, we will agree to disagree.

Mallik: I have two suggestions that let retail shareholders come in at cut off, it is an excellent idea.

Doshi: It is a continuation of your earlier idea right?

Gupta: I won’t agree with that.

Doshi: Can you explain briefly how this cut off would work?

Mallik: We must also have a process whereby allow this only for the real retail.

Doshi: What do you mean by real retail?

Mallik: Real retail means there is a threshold. In the buy back regulation there is a threshold.

Doshi: The Rs 1 lakh?

Mallik: No, the Rs 2 lakh. So that this is the threshold. You keep it for the really small shareholders, you allow them to come in and say that I am bidding at cut off.

Gupta: Today those shareholders bid at a different price. What you are saying is that all the retail shareholders have a cut off price. This x percentage of shareholder is available at any price which is decided by the management or by the promoter. In India the biggest problem is that of camouflage shareholding. As you know that all the public shareholders are not real shareholder, many are the promoter shareholder. For example what has happened recently with Vishnu Sugar, the promoters have 74 to 75 percent shares, they have three more shareholders who are holding 20 percent. Earlier they were with the promoter, now they sold it to somebody else. So ultimately it is promoter shareholding. So camouflage shareholding is one of the most disturbing thing.

Doshi: Can we not do away with the cut off if the solutions that you all have offered which have to do with alternative one in the pricing mechanism which is that you do Reverse Book Building and then you end up with a counter offer in case the Reverse Book Building fails. So you do Reverse Book Building with Dutch auction; if the price is too much for the promoter, the promoter makes a counter offer.

Mallik: Then you don’t need the cut off. You are making a counter offer, so now it is a fixed price. The shareholder knows the price you don’t need a cut off.

Doshi: I can’t imagine any of you disagreeing with the tax structure. This is something that plagues all tender offers of whatever sort and that needs to get resolved and it hasn’t all these years. There is no discussion in this. Participation of depositary receipt holders?

Gupta: It is a fair suggestion that they should be included but my suggestion is, and I have already written to SEBI, that first they should be included in the total shareholding also. You can’t say that you are not part of the shareholding and you can participate.

Parekh: I agree.

Mallik: You can include them in the numerator and the denominator but frankly this is not going to help much. It is going to increases the administrative complexity of the entire thing multifold. We will now have to appoint an overseas depository escrow custodian, who is going to collect depositary receipts, who is going to verify who the ultimate holder is.

The SEBI report deals with two more issues- shortening of process time and threshold limits. Since all private companies now have a minimum 25 percent public shareholding the committee suggests there be just one delisting threshold of 90 percent. All three panelists agree with that.

Threshold Limits: Proposal

One threshold of 90% for successful delisting
(Existing: Higher of 50% of public shareholding or 90% promoter holding)

As for shortening the process, the committee offers three options. First, do away with separate shareholder approvals. All our panelists agree this step can be done away with as shareholders express their choice when they decide to tender or not tender their shares. The second option relies on a switch to the fixed price mechanism. The committee says it can reduce the time consumed by allowing the acquirer to announce an offer price before the postal ballot. The third option is to do away with exchange approval. The committee says if stock exchanges maintain a list of companies compliant with the listing agreement then there will be no need for a separate in principle approval from Exchanges. Not all panelists agree with the feasibility of this solution.

Process Length: Proposal

Do away with 2-step shareholder approval
Allow acquirer to announce offer price before postal ballot
No Exchange approval & Exchange to maintain list of compliant companies

Mallik: Stock exchanges are totally overwhelmed with work. You cannot expect them to maintain a database of companies which are compliant, but you can reduce the process of checking of compliance.

Doshi: The other things they have not tackled in this paper is the Fresenius Kabi problem as I call it because you described another company which had this similar situation. You could argue that that is an abuse of a process, you cannot design a set of regulations only to deal with abuses, you have to design them with an efficient process in mind and catch those who abuse it and punish them. The third thing that they have not suggested here which they could have is the squeeze our because what is the point, you go through all this process, you acquire 90 percent and if there are still, as Cadbury has discovered, some few thousand shareholders out there who are refusing to give up their shares then you have to service those shareholders with whatever paperwork required etc and that is just painful and that is not delisting.

Mallik: Lets deal with the earlier one that you mentioned- the aspect of abuse of the regulation,- they have tried to indirectly address it by saying that shareholders who held for more than a year, 50 percent of those should tender and all. All of the suggestions there actually are very onerous. So we will go out from the frying pan into the fire if some of those actually come in. Instead we could potentially have some other transparent mechanisms out there. For example today there is a minimum time period between getting listed and attempting to get delisted. So we could similarly have a minimum cooling off period between doing a capital raise, Offer for Sale (OFS) preferential issues.

Doshi: Which already exists, right?

Mallik: No, it doesn’t exist. You could theoretically do it.

Doshi: Squeeze out?

Mallik: Directionally at least we could have said that we could have a squeeze out if there is a higher threshold met, something or at least directionally we have to get there. You are absolutely right.

Gupta: There is a fundamental question that what is wrong with it if I continue to be the shareholder of a delisted company.

Doshi: They don’t want you to be a shareholder of the company; so get the message at some point in life.

Mallik: We are saying that the minimum public shareholding is 25 percent; out of that 15 percent is tendering in a delisting offer. So you are kind of already looking at the majority in that context by value. Now the question is if somebody wants to do a squeeze out and it is not necessary that all shareholders or all promoters necessarily want a squeeze out because there is obviously a price attached to it and there is a period of marketing, there is an exit window, etc and all. So you could potentially have a situation where at the end of all of this you achieve a threshold which is 95, 96, 97% -whatever is the number- at that point in time at least allow them to squeeze out the rest.

Parekh: I will give you the counter view which is on the one hand the current delisting is saying that you are living in a house, you can continue to live in that house but it will be a different house, there will be a more sparser house but we will give you a premium if you exit. On the other hand you are saying that I don’t want you to live in that house, I want you to get out and here is the cheque. They are very different paradigm shifts.

Doshi: I am saying there were 100 people in the house, 90 have exited, you are the last 10 people in the house.

Parekh: That is no reason. It is my house, you can’t ask me to exit at any price.

Doshi: We will rest the case here. We have all of your views on some of these suggestions that SEBI has put in. Let us hope that SEBI is listening.


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