SEBI Proposes changes for delisting of securities

In an endeavor to provide a level playing field to the participants in the securities market while not compromising on the protection of investor interests, it has been decided to bring about certain changes in the Guidelines that are felt necessary. The following paragraphs elucidate the nature of changes proposed and the rationale behind the proposed changes:

1. Conversion of guidelines into Regulations: The provisions governing Delisting of Securities were initially envisaged only as a guiding framework to provide for an exit option at a determined price with the Stock Exchange overseeing the compliance. Consistent with the need to have appropriate instrumentalities, it has been decided to convert the Guidelines into Regulations.

2. Book Building Process: The following was noticed in the scrutiny of the current process of price discovery through book building:

a. Disproportionate Powers with public share holders holding major chunk

b. Possibility of frivolous Bids to destabilize the delisting offer

c. Freedom to promoters to reject the price discovered.

d. Revision of bids leading to cartelization in the discovery of price. It was increasingly felt that the book building process, which was to aid in the determination of a fair exit value for the shareholders, was not fully achieving the said objective and the perceived investor friendliness of the price discovery mechanism was not necessarily translating into genuine discovery of price. Thus emanated a need to look for an alternate pricing mechanism and hence the current proposal which is as under:

It is proposed that the price would be the higher of –

a) The fixed price which would be the floor price plus a premium of 25%. The floor price would be determined in terms of Regulation 20 of SEBI (Substantial Acquisition of Shares and Takeover) Regulations.

b) Fair value determined by an accredited rating agency plus a premium of 25%. The relevant provision is annexed at Regulation 14(4) of the proposed draft Regulations.

Further, the reference date for calculating the floor price is the date of Public Announcement currently. This was felt to be resulting in fluctuation in price from the time the decision to delist is taken by the Board and the Public Announcement. In order to correct this anomaly, it is proposed that the reference date for calculation of floor price would be the date on which the stock exchanges are notified of the Board meeting in which the delisting proposal was considered. This is in line with the provisions of the Takeover Regulations.

3. Absence of Minimum Subscription: The success of the exit offer under the current provisions of the Guidelines is linked to the crossing of the continuous listing requirement. This gave rise to a situation that securities were bound to get delisted if the public shareholding reduced from the levels required to be maintained for the purpose of continuous listing.

While the rationale of mandating levels for continuous listing is based on good corporate governance, providing the same levels as eligibility for delisting was resulting in delisting of securities even while a huge residue of public shareholding remains, which is primarily against investor interest. World over, in matters of delisting, it is a known fact that a 10% level of public shareholding was considered as a prudent level for squeeze out option to the promoters whenever companies wanted to delist.

Thus as a measure to arrive at plausible levels of public shareholding, below which companies wishing to delist their securities could do so, it is proposed to introduce a level of 10% of public shareholding (in consonance with international practices) as the breach percentage level for eligibility for delisting. The relevant proposal is as under :

Minimum subscription to be introduced: Success of the offer depends on a minimum subscription resulting in the public shareholding reducing below 10% or 4%. Thus, the promoter holding should breach the 90% level or 96% level as the case may be depending on the categorization of the company under Clause 40A.

4. The exit offer to be available for all shares : With the dispensing of the book building mechanism which was available only for shares in demat mode, the anomaly arising therein has been addressed. Now shareholders holding shares in both physical and demat mode can participate in the offer.

5. Settlement procedure: In order to simplify the settlement system, it is now proposed that the settlement would be made separately through the Merchant Bankers and Registrars as is being currently done in open offers under SEBI (SAST) Regulations.

6. Time Lines for various activities: Current guidelines give only the skeletal framework for delisting the securities. It was felt that many procedural aspects needed clarification. Hence, in order to bring about clarity and provide for a structured framework, certain time lines have been proposed in the Regulations.

7. Reporting Requirements: The extant Guidelines do not prescribe any kind of reporting by the Stock Exchanges. Though it is intended to keep the monitoring aspect purely with the Stock Exchange, certain overall reporting requirements are being prescribed which were felt necessary for the smooth working of these Regulations.

The above points highlight the major changes that are being proposed in the proposed Delisting Regulations. The above is an attempt to provide the basic reasoning behind the proposed changes. Though a consultative process has been adopted and the views of market participants have been considered in preparing the Draft Regulations, the revised draft regulations and the rationale for revising them are once again placed in public domain for comments and suggestions.

Source : Equity Bulls

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