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DE-LISTING: EASIER, TOUGHER & THE KABI FIX?

Published on Thu, Nov 20,2014 | 09:10, Updated at Thu, Nov 20 at 09:10Source : Moneycontrol.com 

DE-LISTING: EASIER, TOUGHER & THE KABI FIX?

By: Menaka Doshi, Executive Editor, CNBC TV18

The changes proposed by the SEBI Board make de-listing both tougher and easier at the same time. And then there’s the KABI FIX!

The biggest complexity in delisting is the reverse book building price – SEBI’s own discussion paper points to market opinion that says  ‘discovered price through Reverse Book Building (RBB) process has been unduly influenced by a set of investors who are mainly speculators’ and that ‘Retail investors find it difficult to comprehend the RBB process resulting in lack of participation by the retail investors’.  Yet the same paper goes on to suggest that ‘the RBB process provides the public shareholders an opportunity to determine the price, it may be continued but with some checks and balances to address the aforesaid concerns.’

So it’s disappointing but not surprising that Reverse Book Building has survived the new regulations. But it has been tweaked, as has the acceptance threshold. Before I get to that let me list what I consider are the more positive developments of the day.

1. All de-listing Offers will now take place on-exchange, as will offers for Buyback and Takeover offers!

SEBI’s press release puts it succinctly as ‘Use of Stock Exchange platform for offers made under Delisting, Buy Back and Takeover Regulations’

So far in a delisting offer shares were tendered and bought off-exchange, attracting long term capital gains tax. That disincentive has been done away with allowing shareholders to decide basis price etc…not tax!
This is good news for buyback and takeover offers as well!!!

2. That an acquirer can delist pursuant to a takeover offer!

SEBI says ‘Option to the acquirer to delist the shares of the company directly through Delisting  Regulations pursuant to triggering Takeover Regulations has been provided.  However, if the delisting attempt fails, the acquirer would be required to complete the mandatory open offer process under the Takeover Regulations and pay interest @ 10% p.a. for the delayed open offer’

So far the Takeover Code required an acquirer to pare his stake back below 75%, incase he crossed that threshold pursuant to an open offer. And then wait for a year if he was desirous of de-listing. That meant he bought shares and sold shares only to buy them back again! This change makes it possible for him to express his intent to delist via the takeover offer and do so if he gets the requisite shares.

And that brings me to the not-so-good news!

3. SEBI has changed the acceptance threshold  & price for a de-listing offer to succeed!

The 2009 guidelines define the acceptance threshold and price as

17. An offer made under chapter III shall be deemed to be successful if post offer, the shareholding of the promoter (along with the persons acting in concert) taken together with the shares accepted through eligible bids at the final price determined as per Schedule II, reaches the higher of –
(a) ninety per cent. of the total issued shares of that class excluding the shares which are held by a custodian and against which depository receipts have been issued overseas; or
(b) the aggregate percentage of pre offer promoter shareholding (along with persons acting in concert with him) and fifty per cent. of the offer size.
Schedule II
12. The final offer price shall be determined as the price at which the maximum number of equity shares is tendered by the public shareholders. If the final price is accepted, then, the promoter shall accept all shares tendered where the corresponding bids placed are at the final price or at a price which is lesser than the final price. The promoter may, if he deems fit, fix a higher final price

In terms of the acceptance threshold there is no need for both options as the minimum public shareholding limit is now fixed at 25%. So option (b) was expected to go anyways. But SEBI has added another twist to the threshold. Today’s press release says

‘The delisting shall be considered successful only when (A) the shareholding of the acquirer together with the shares tendered by public shareholders reaches 90% of the total share capital  of the company and (B) if atleast 25% of the number of public shareholders, holding shares in dematerialised  mode as on the date of the Board meeting which approves the delisting proposal,  tender in the reverse book building process.
The offer price determined through Reverse  Book Building  shall be the price at which the shareholding of the promoter, after including the shareholding of the public shareholders who have tendered their shares, reaches the threshold limit of 90%’.

That means the acquirer has to achieve 90% or more ownership and do that by getting atleast 25% of the number of public shareholders to tender their shares. That’s some challenge!

But this provision also serves as a safeguard…more specifically ‘THE FRESENIUS KABI FIX’. SEBI may have put this condition in to ensure that a handful of shareholders don’t collude with the promoter to make the de-listing a success. In fixing the KABI problem though has SEBI made it tougher for companies to de-list? Or will the change in tax treatment serve as incentive enough for several public shareholders to participate in the de-listing? I suppose we’ll know only once a few de-listing efforts are made.

That said, the new pricing norm is definitely an improvement! But it may not be worth much if the participation threshold is difficult to achieve.


In the last 5 years only 38 companies have attempted to de-list in India. The 29 that succeeded paid an average premium (above floor price) of over 60%.  In the 9 that failed the average premium demanded exceeded 100%. Will these new de-listing norms prompt more companies to de-list? I’m not sure the answer to that question is a resounding yes.

Reference Reading

SEBI”s De-listing Guidelines, 2009: http://www.sebi.gov.in/acts/delisting2009.pdf

SEBI’s discussion paper on de-listing: http://www.sebi.gov.in/cms/sebi_data/attachdocs/1399633833837.pdf

The Firm discussion on SEBI’s de-listing discussion paper: http://thefirm.moneycontrol.com/story_page.php?autono=1104606

The Curious Case of Fresenius Kabi: http://thefirm.moneycontrol.com/story_page.php?autono=903762  & http://thefirm.moneycontrol.com/story_page.php?autono=949973

Delisting via OFS Route: http://thefirm.moneycontrol.com/story_page.php?autono=1055331

 
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