SEBI Proposes Alternative Mechanism For Delisting Of Shares

To enhance the efficiency of voluntary delisting, the Securities and Exchange Board of India, on Monday, proposed a relook at certain aspects of the delisting framework.

The proposals are based on recommendations by the Keki Mistry Committee, which submitted its report on Aug. 8. The regulator has proposed allowing fixed-price delisting as an alternative to the existing reverse book-building mechanism. Recommendations are also made to provide a delisting framework for investment holding companies and reduce the threshold for making a counteroffer.

Under the proposed fixed price mechanism, the promoter would offer a fixed price to delist the shares. This, however, comes with conditions. The fixed price offered by the promoter cannot be less than the floor price determined under the delisting regulations. The delisting would be considered successful only if the post-offer shareholding of the promoter reaches 90% of the total shareholding of the company.

At present, shares are delisted via a reverse book-building mechanism where shareholders place offers for the price at which they are willing to sell them back to the promoter. The method, according to the committee, paves the way for speculative activities as there is increased volatility in the shares after the delisting announcement. Considering these issues, SEBI, after its last board meeting, expressed its intention to review the delisting framework.

Proposals are also made to provide a framework for delisting investment holding companies. These are companies whose main activity is to hold shares in other companies. These shares are usually traded at a discount, as the market doesn't expect the shares to be sold and therefore doesn't reflect the intrinsic value of the investments.

As there is no separate framework for IHC, these companies are often forced to delist at a price much lower than their intrinsic value. In order to solve this, SEBI has proposed that the shares held by the IHC in other listed companies be sold to the public shareholders of the IHC in proportion to their shares, and then the extinguishment of public shareholding through a reduction of capital as provided under the Companies Act, 2013.

Apart from the above recommendations, SEBI has also suggested a review of the existing threshold for making a counteroffer.

At the moment, a promoter is required to give the public shareholders an exit opportunity upon delisting, and the price at which the shareholders can exit depends on the bids made by them. The price is reached only if the bids, along with shares already held by the promoter, exceed 90% of the total shares.

If the promoters are satisfied with the discovered price, they can accept it or make a counteroffer. However, no counteroffer can be made if there are not sufficient bids. This may lead to a scenario where delisting fails even when most public shareholders are in its favour.

In order to solve the issue, SEBI has proposed reducing the existing threshold. Under the present proposals, promoters would be able to make a counteroffer if the bids received are higher than either 50% of the public shareholding or the difference between the promoter's holding and 75% of total shares.