In an effort to simplify the delisting process from the securities market, the Securities and Exchange Board of India (Sebi) has introduced a fixed price process for voluntary delisting of shares, offering an alternative to the existing reverse book building (RBB) model.
This move aims to enhance clarity and transparency for shareholders while potentially spurring mergers and acquisitions (M&As) in the market. However, the acceptance of this model remains uncertain, said market experts.
The new framework requires the fixed price offered by an acquirer to include at least a 15% premium over the floor price set by delisting regulations.
Sebi chief Madhabi Puri Buch, during a press conference last week, highlighted the need for a more flexible market environment, said, “Why should we say that once you are listed you can never leave? This isn’t Hotel California. This is a rich, vibrant market; we welcome people, but if for some reason they need to exit, they must be able to.”
The 15% premium limit was determined after analysing past delisting data, including both successful and frequently traded delistings, Buch explained.
Delisting is a process of turning a public company private, often aimed at making long-term changes that might not seem beneficial in the short term.
“The introduction of a fixed price delisting regime is a game-changer. It seeks to simplify the road to delisting, which has so far been highly elusive on account of the RBB method for price determination,” said Abhishek Dadoo, partner at Khaitan & Co.
The old regime’s RBB process often led to extraordinarily high prices, making delisting commercially unviable.
However, the new model is not without its challenges. “The attractiveness of a 15% premium depends on market conditions, the company’s valuation and investor sentiment. It may be sufficient for some shareholders but not for all, especially if they believe the company has higher future potential. Further, maintaining the 90% acceptance threshold remains a significant hurdle, which can be challenging, impacting the success rate of delistings,” said Vatsal Gaur, Partner at King Stubb & Kasiva Advocates and Attorneys.
Sebi has also reduced the threshold for making a counter offer from 90% to 75%, provided at least 50% of the public shareholding has been tendered, allowing acquirers to adjust their offers if the initial offer fails.
Experts indicated that if the fixed price or counter offer is deemed too low, shareholders may reject it, causing the delisting to fail. Market fluctuations can also influence shareholder decisions regarding offer value.
The new fixed price delisting regime is also expected to boost public M&A activity, making it easier for companies to consolidate ownership and make strategic decisions.
“Sebi’s move aims not just to spur M&As but also to ease the process, facilitating business from both entry and exit standpoints, which helps in efficient resource allocation in the economy,” Vivek Iyer, partner – Financial Systems at Grant Thornton, said.
While the changes introduced by Sebi are designed to facilitate delistings and potentially spur M&A activity, their effectiveness will depend on specific market dynamics and individual shareholder responses, experts said.
