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De-Listing: Easier, Tougher & The Kabi Fix?

Published on Sat, Nov 22,2014 | 13:41, Updated at Mon, Nov 24 at 23:04Source : CNBC-TV18 |   Watch Video :

It’s been a week of big bang announcements from market regulator SEBI. New Prohibition Of Insider Trading Regulations, new De-Listing Regulations, The Listing Agreement will now be converted to regulations and new settlement norms. That’s not all – SEBI’s board will also review proposals on the re-classification of promoters as public, issuance of partly paid shares & warrants, E-IPOs & restrictions on wilful defaulters. That should keep us busy for the next one year or so. But on this episode we are going to focus on the new de-listing modalities. Because interestingly, the changes proposed by the SEBI board make de-listing both tougher and easier and then there’s the Kabi fix! Joining me today – Sourav Mallik of Kotak & corporate lawyers Sandip Bhagat & Sandeep Parekh.

SEBI Announcements

New Prohibition of Insider Trading Deregulations
New De-listing Guidelines
Conversion of Listing Agreement to Regulations
Pre-Show cause Notice Settlement

SEBI Will Review

Re-classification of Promoters as Public
Issuance of Partly-paid Shares & Warrants
Imposing Restrictions on Wilful Defaulters

Doshi: Sourav, the fact that the de-listing offers will now take place on exchange as will offers for buybacks and takeovers, so that is definitely good news because it deals with the tax anomaly.

‘Use of Stock Exchange platform for offers made under Delisting, Buy Back and Takeover Regulations’

Impact: Shareholders can avail of long term capital gains tax exemption

Mallik: That is a very good move it is going to help the capital markets over all at large. All of these transactions now will be routed through the exchange and hence the benefit of the capital gains exemption which is available for all trades on the stock exchange should be available for these transactions. So, in that sense that fixes the anomaly that was there that if you did a transaction participated in the tender offer or a de-listing offer you had to pay a capital gains tax whereas if you transacted on the floor of the exchange sold in the market you didn’t have to, because you paid securities transaction tax (STT) anyways.

Doshi: Public participation and de-listing offers has also sometimes in buyback offers and in tender offers under the takeover code has often been very poor. Do you think something like this could be a game changer, more people will participate at least based on the data we have?

Parekh: That may also depend on whether they create a separate window for this or they just plug the whole market in. Latter is unlikely but it may be interesting to kind of just plug the entire sell side of the market – more likely a separate window.

Bhagat: The one issue I still have with the regulation is just the concept of having the reverse book build pricing and whether that is easily understood by a retail investor. The more sophisticated public investors would probably understand it. I am not to sure; this is all benefit of the retail, benefit of the public. I am still not too sure just having a complicated pricing formula built in whether that will be instinctively understood. Everybody will understand the tax incentive for sure whether they will get how the pricing works and at what price it will get, that is still some…

Doshi: And that will hold them back from being able to participate in something like that

Mallik: To add to that it definitely helps in the context of fixed prices offers. That means that you have a tender offer or buyback at a fixed price, it doesn’t help that much in the context of a de-listing offer because today an informed investor who is today participating and choosing to sell in the market, remember when you participate in a de-listing offer there is always an uncertainty whether it will be accepted by the acquirer. So, if the market price is close to the price that you think the acquirer is going to play you will anyway where in the market so it doesn’t help that much in a de-listing offer.

Doshi: So that could also be in the case of tender offers because specially when it is a limited tender offer you are not sure if there is a big upsurge in participation that your shares will get accepted fully, you might get accepted only in proportion and so therefore you might choose to still exit via the market route where you can sell all your shares but at slightly lower price to that extent.

Mallik: Having said that at least for a tender offer definitely there is an advantage at least for the portion that is being accepted.

Doshi: The other piece of good news is that now the new de-listing norms whenever the text is fully out will allow for de-listing via a tender offer. This was the anomaly that existed even after the takeover rules were reviewed and reformed and Sourav was on that committee and they didn’t allow an acquirer to do so. In stead if you exceeded 75 percent through your open offer you had to come down below that level wait for a year and only then launch your de-listing offer so to speak which was quite silly, now they have attempted to fix it. Clean clear path of being able to acquire and then de-list?

‘Option to the acquirer to de-list 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’

Impact: Acquirers can take company private via takeover offer

Bhagat: We are still waiting for the actual amendments to come through both the de-listing, the actual text of the regulations are not out as yet including to the takeover code. It is something which was needed this was a fix for the takeover code which this has helped; the one issue to keep in mind is that the de-listing offer can only be made by a promoter. Now if you are an acquirer in a takeover situation if, lets say you have an agreement with a promoter to buy out his shareholding are you counted as a promoter for purposes of de-listing that should hopefully be clarified.

The second situation is let say you have no agreement with a promoter, let say you want to acquire more than 25 percent and launch a tender offer and do a de-listing and the company already has existing promoters on hostile situation where would you be, would you be able to do a de-listing because you are technically holding no shares or a very little shares you are not a promoter at that and your initial issue under the de-listing is are you a promoter or not because only promoters are permitted to de-list.

Doshi: So can this be fixed may be simpler by just taking away the need for the person who is doing the de-listing to be a promoter. So if you just fix it in the de-listing regulations whenever they are out, then will your problem be solved so to speak?

Mallik: Actually it can be fixed like that but one has to remember that the 2003 de-listing guidelines actually had promoter or acquirer and SEBI in their wisdom when they changed that in 2009 they deleted acquirer, they just made it promoter.

Doshi: So may be they can restore it to promoter and acquirer in the new regulations right?

Mallik: The other thing which is very important to be clarified is that in such a de-listing offer pursuant to a transaction that triggers a mandatory tender offer, will the pricing in such a de-listing offer be a fixed price offer or will it be a reverse book building price discovery as with other de-listing offers. If that is the case that just queers the pitch completely and it becomes unclear as to what it is. If it is a fixed price offer it is a great welcome move.

Doshi: But then can you have all other de-listing happening through reverse book building but de-listing through a tender offer or a takeover route happening through fixed price. You are then creating arbitrage to some extent.

Mallik: Yes and in fact if you think about what SEBI has said, I get the feeling that they are thinking that this would still be a reverse book building price because there is a word they are saying that if this offer is unsuccessful then you need to do a mandatory tender offer with a 10 percent p.a. cost. So that means they are thinking that okay it will be a reverse book building process. Otherwise there is no situation in which the de-listing will fail and a mandatory tender offer will start after that. You could have just one offer in which if you reach 90 you could de-list. If you didn’t then you will have to comply with the takeover code. If you are below 75 fine, if you get to the middle then you come down. Seems like it is not clear as to what they are thinking.

‘Option to the acquirer to de-list 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’

Impact: Acquirers can take company private via takeover offer

Parekh: My understanding is different that I think there will be a two track process. If you are doing a combined takeover and a de-listing offer there will be a single open offer, there will be no reverse book building according to my reading.

Doshi: But then that means you are de-listing via a fixed price decision.

Parekh: Correct so there is a two track system and that was my reading, I may be wrong; we will have to see the exact guidelines.

Doshi: But doesn’t that then create a loophole?

Parekh: I don’t know if you would call it a loophole because you are expected to offer a price sufficiently high for you to breach the 90 percent, for you to succeed. If you don’t breach it, say you stay at 85; you are expected to come down to 75 in the next one year.

Mallik: Let us get back and see what the TRAC had recommended at that time was that if there is a change of control pursuant to which there is a tender offer then you should be allowed to do a direct de-listing as opposed to if you are already a promoter and you are making a voluntary offer because you are crossing 5 percent per annum, that is not a situation where you are allowed to make a de-listing offer. So existing promoters cannot use this mechanism.

Doshi: That is what the TRAC said, I am saying what the takeover code says today and what seems to have been suggested in the press release by SEBI seems not to be clear about whether it will be a single route or a dual route. Sandeep is saying it is a single route. If it is a single route then in this case at least the press release by SEBI says and it keeps referring to it as an option to acquirer to de-list the shares directly through de-listing regulations pursuing to triggering takeover regulations. That means suppose the promoter was to exceed his limit of purchases in a year thereby triggering the takeover code then could he use that open offer to de-list the company. So I am just asking you promoters could misuse then this process and use this route then go through the regulations.

Parekh: What’s wrong with it, if you have a sufficiently high price you can breach 90 percent.

Doshi: But if somebody wants to genuinely de-list goes through the genuine de-listing route, goes through the whole reverse book building process requirement, etc. In this case you may want to de-list but you don’t want to go through that pain so you acquire more than you can in terms of your annual threshold, you trigger a takeover offer and then you use that takeover offer to do a complete de-listing. Are you misusing the route?

Parekh: Definitely a parallel track for sure.

Mallik: So it is not clear as to whether it is going to be a parallel track or a single track. In principle it shouldn’t be available for existing promoters who are looking to increase their shareholding; there cannot be a dual track for them. The only suggestion was that if you have an acquirer coming in and there is a change of control and there is a price that is available, then they should not be asked to do a de-listing through a reverse book building because what does that mean then that the sellers are going to get one price and then the public shareholders through the reverse book building transaction are going to get a different price or is it in the interest of the company for this traction to go through, will the public shareholding process through the reverse book building hold the main deal to ransom and will that go through or not? All of these questions come up.

Parekh: It has become incredibly complicated to have two separate processes.

Doshi: So are we finally opening the doors to what our traditional buyouts right in this country where you can buy out a company so if you acquire some stake, you trigger a takeover code and then you take that company private which is typically how private equity functions everywhere in the world. I am not sure whether I should ask that question anymore given the grey areas that they have already raised?

Bhagat: Yes I think we will wait till the final text but I think the door has opened a little only, I don’t think it is wide open as yet.

Doshi: So you expect as well that they will restrict it to only acquirer’s right?

Bhagat: Yes I would think, let us see where but that is where I am looking at it. I also think the big private equity question is also even after I have also de-listed the company can I get a complete squeeze out? And I think that question still remains.

Doshi: The 2009 de-listing guidelines currently enforced say a de-listing offer is successful only if the promoter acquires either 90 percent of all shares or 50 percent of the public shareholding whichever is higher. The new norms retain the 90 percent threshold but imposing new condition that at least 25 percent of the number of public shareholders should tender their shares in the reverse book building process. Could this new threshold be the death of de-listing?

Acceptance Threshold

De-listing successful if promoter  

2009                                                                     Now
Acquires 90% shareholding                      Acquires 90% of shareholding  
OR                                                                      AND
50% of public shareholding                       At least 25% of number of public shareholders tender shares

Mallik: So lets split it into two the first thing that they have done is welcomed which is that they have removed the words 50 percent of public shareholding anyway that is now redundant because all companies are now complaint and they are below 75 percent. However if you think about the second condition that has been imposed for this which is 25 percent of all shareholders holdings shares in demat form. One has to look at what is the acceptance ratio today in terms of shareholders who tender in a de-listing offer. Our experience from the dozen odd transactions that we have done is that the average is anywhere in the region of about 5 percent and it really goes up between 6.5 to 7 percent. So, normally we have about 6-7 percent of public shareholders acquiring shares in de-listing this is by number of shareholders. Even if you take the argument that because of the tax treatment and so on that number will go up it is a far cry from 25 at this point in time. So, that is going to remain probably a big challenge as a part of this de-listing.

Acceptance Threshold

De-listing successful if promoter  

2009                                                                     Now
Acquires 90% shareholding                      Acquires 90% of shareholding  
OR                                                                       AND
50% of public shareholding                       At least 25% of number of public shareholders tender shares

Bhagat: I don’t know if enough statistics were done or enough precedence were looked at to figure out where this 25 percent came from. The number of shareholders which are public which actually tender is a much smaller number than the 25 percent. So, you’re starting of these regulations by having a condition which has not been met in the past.

Parekh: This is a huge deviation from what Financial Sector Legislative Reforms Commission (FSLRC) has recommended and the ministry has asked the regulators to implement which is every substantive change which you make must go through a public CON process and this was not out at public domain at all, this 25 percent of shareholders... So, they will have to relook at this at another board meeting. This can’t be over-ruled accepted by the board.

Doshi: I am going to play Devil’s Advocate here; I am not at all suggesting that what Securities and Exchange Board of India (SEBI) is doing is right I understand the procedural difficulties of getting so many people to respond to a de-listing offer. However in the last year or so we have had two interesting de-listings take place the Fresenius Kabi case and Astra Zeneca case, where a certain limited number of institutions participated in making the de-listing a success and these were the same institutions that these companies that plays shares with via an OFSjust a few months before the de-listing. Lots of flack that SEBI got at that point in time…Is this the Fresenius Kabi fix?

Parekh: You have to look at a statistic, if you are looking at 4 percent success rate in terms of number of shareholders who is tendering shares for you to say that we will not allow you to do a de-listing

Doshi: But you have to look at the flack that the regulator got…

Parekh: But you can’t kill the product, you go from 5 to 7, 8, 10% but to kill the entire process in the name of investor protection, I don’t know if it’s actually helping investors.

Bhagat: One of the issues there was the promoters sold their shares to affiliated entities and then later on used the de-listing process and those affiliated entities tendered and it was allegedly affiliated. However they have now for example a provision which says if the promoter or any promoter group has sold shares six month before then you are not illegible. So, they have tried to meet some of that.

SEBI’s New De-listing Guidelines
Promoter (group) prohibited from making a de-listing offer if it has sold shares of the company in the 6 months prior to de-listing decision

Doshi: Is six months before a good enough safeguard. You could do this deal 12 months in advance. Look de-listings don’t happen on whims and fancies, you plan these things. So, you could decide today that 12 months from now I want to de-list this company you could create some sort of equity placement where by your equity goes into the hands of a few friendly shareholders so to speak and then use those friendly shareholders to make your de-listing a success a year down the line. Is this an effort to plug that? I suspect the answer to my question on that is yes. Is this the wrong effort to plug that I suspect all of you are going to say yes to that as well.

Mallik: I won’t say that entirely one needs to step back a little bit and understand what is the real reason why people don’t tender in reverse book building offers and the real retail public shareholder? They don’t tender in a reverse book building process because they don’t know how to evaluate a price, how to really tender and shares and comfort that they will get the ultimate price that the acquirer will offer. The directional change that SEBI is making is correct but we need to have a process fix to see if we can really get there. What do I mean by that? Suppose you extended the process a little bit and said that you had a reverse and front book building process and you allowed an additional week in which after the price discovery you market that price to other shareholder and let people tender and at that end of the process you test the 25 percent threshold I think you are probably home. It is a good thing in the right direction but coupled with reverse book building it is a challenge. So if we manage to do that we would make a significant progress in terms of making the de-listing balanced as well as offering a solution that really works.

Doshi: I think that is a fair suggestion because reverse book building is where the big mental block lies, right, for most of us to be able to understand it, to navigate it, to want to participate in it. Since that SEBI refuses to do away with and that was quite evident even in its discussion paper that look we are unlikely to do away with this, we can tweak and change and make it little bit more investor friendly then maybe this is the better way to do it.

Mallik: And we have applied a lot of thought on this and I would tend to agree based on all mechanisms. You really cant fault the reverse book building process in terms of price discovery because at the time when you go for IPOs, you use that same process and that is only fair, any other process is fought with its own challenges. However, retail shareholders do not understand this. So, we need to find a fix which marries the two objectives and this is one of the thoughts. If you look at delisting offers today, in the post delisting era when you have a fixed price and you have an exit window, we have seen shareholding levels go up from 91-92 which is normally after delisting offer all the way to 97-98-99 and how is that and why is that is happening because there is a price out there. So it’s easier to understand.

Doshi: I also want to bring up here at this point that there has been a positive development on price even though we decry the fact that reverse book building has not gone away in terms of a process, they have now said that the offer price will be determined at the level at which you cross 90 percent as oppose to the earlier method where the price would be the price at which the maximum bids came in. This method that they have proposed and which is likely to be in the new regulations is a far easier method to work with, isn’t it?

Final Offer Price

Price at which maximum number of equity shares tendered

Price at which promoter shareholding reaches 90% threshold

Parekh: Last time we discussed the clearing prices – there was an agreement last time as well.

Mallik: 90 percent by itself is of course absolutely fine coupled with the other restriction that makes it worse than the current situation where…

Doshi: It’s the 25 percent.

Mallik: 25 percent, which actually means that the last person in the queue in the 25 percent bracket can determine the price even if you hold up the delisting even if you hold one share as oppose to a large block of shareholders.

Doshi: At this point in time given what SEBI has proposed, has this delisting process in totality, all the pros and cons that we have discussed gotten better or worse. Do other countries have a more easier delisting process; are they more at ease with the culture of allowing companies to exit the market place?

Bhagat: The markets where there are greater numbers of companies where there is more liquidity, I think yes. I do not know about market similar to India but the US for example yes, they are more comfortable in exits and in companies making IPOs. So in that sense there is still reluctance on the regulator to allow quality companies to completely go away and de-list. I think some of this is – there is a bit of background on that – kind of couched within minority shareholder protection and I do not think that has gone away and I expect and in some ways you can see where the regulator is going and you are not entirely unsympathetic is that from the regulator perspective yes, we want the quality companies not to go away.

Doshi: But that’s not the regulator’s job or business at all to determine, right?

Bhagat: I agree

Doshi: If this - what SEBI has put out through its press release becomes the final resolution. Will you say it is virtually the death of delisting in this country?

Mallik: It will become significantly challenging for companies to delisting.

Parekh: This would clearly be the death of delisting.

Bhagat: This would be the death of delisting.


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