The Securities Exchange Board of India (SEBI) notified the SEBI (Delisting of Equity Shares) Regulations, 2021 on June 10, 2021 in order to make the existing delisting Regulations robust, efficient, transparent and investor friendly. The new regulations do not substantially deviate from the erstwhile SEBI (Delisting of Equity Shares) Regulations, 2009. However, certain incremental changes are introduced that further refine and streamline the delisting process.

The term ‘Delisting’ is defined under the new regulations as permanent removal of equity shares of the company from the trading platforms of a recognized stock exchange, either by way of voluntary or compulsory method making the path of exit for these entities comparatively easier.

Compulsory delisting generally, is caused due to procedural and compliance lapses by the companies. Amongst other causes, the major causes for compulsory delisting include non-payment of listing fee, reduction in public shareholding and failure to meet the same, unfair trade practices at the behest of the management/promoters etc. While compulsory delisting is at the precept of the Stock Exchanges, many companies opt to voluntarily delist themselves primarily to better secure company’s business and financial needs.

Under the delisting regulations as laid down by SEBI that provides the following options to the companies in the case of voluntary delisting:

1. 1. Delisting from all the recognized stock exchanges;
   2. Delisting from any but not all the recognized stock exchanges, including delisting from any stock exchange having a nationwide trading terminal;
   3. Delisting from any but not all the recognized stock exchanges, while remaining listed on the recognized stock exchanges having a nationwide trading terminal.

In the first two cases discussed above, companies have an obligation to provide an exit opportunity to their existing shareholders. While the process in case of the third option above remains the same, changes have been brought about in the way a company has to manage the delisting offer pursuant to provision of exit opportunity.

Some key changes effected by the 2021 Regulations are as follows:

• Compliance with the Regulations:
The regulations make it clear that the acquirer and those acting in concert with it are responsible for compliance with the regulations. The role of the company is merely that of a facilitator. Moreover, the expenses for the delisting offer should be borne by the acquirer.

• Role of the Board of Directors:
On receiving the acquirer’s intention to delist, the Board should appoint an independent company secretary to conduct due diligence and submit a report, certifying that the dealing in the equity shares of the company by the acquirer, its related entities and the top twenty-five shareholders is in compliance with the applicable securities laws. The Board is also required to constitute a committee of independent directors to provide its reasoned recommendation on the delisting proposal.

• Indicative Price:
The regulations provide statutory sanction to the market practice of the acquirer disclosing an indicative price at which it is willing to accept the bids. The indicative price cannot be less than the prescribed floor price.

• Success Threshold:
The threshold for a successful delisting offer remains the same. That is to say, the post offer shareholding of the acquirer, along with the shares tendered/ offered by public shareholders, accepted as eligible bids at the discovered price or the counteroffer price, should reach 90%. However, in calculating this threshold, shares held by the following persons will not be included – (a) custodian; (b) a trust for implementing employee benefit scheme; and (c) inactive shareholders. Moreover, for a successful delisting offer, the requirement that at least 25% of the public shareholders, holding shares in the dematerialized mode, should have participated in the book building process has been done away with.

• Counter Offer:
The concept of a counter offer by the acquirer in case the acquirer is not willing to buy the shares at the discovered price has been retained. The new regulations provide clarity on the method of calculation of book value.

• Withdrawal of the Offer:
The 2021 regulations make it clear that the acquirer is bound to accept the equity shares tendered in the delisting offer, if the discovered price is equal to the floor price or the indicative price, if any, offered by the acquirer. The indicative price is binding on the acquirer and he is obliged to acquire the shares at that price, if the delisting threshold is met, even if the discovered price is lower.

• Additional Rights of Public Shareholders:
Public shareholders may now to inspect the documents referred in the letter of offer. Moreover, in participating in the offer, public shareholders can create a lien in favor of the Manager to the Offer as opposed to depositing the shares.

• Reduction in Escrow Amount:
The acquirer is now required to deposit 25% of the total consideration (as opposed to 100% of the total consideration). The balance 75% is required to be deposited before making the detailed public announcement. Upon determination of the discovered price and making of detailed public announcement, the acquirer is required to deposit additional sums, sufficient for payment of consideration to public shareholders.

• Depositary Receipts:
It provides that after delisting of shares in the home jurisdiction, a listed company should delist all of its depository receipts issued overseas and change them into the underlying equity shares in the home jurisdiction, after termination of the depository receipts programme, within one year of such delisting.

• Role of the Manager to the Offer:
The new regulations have expanded upon the role of the manager to the offer for ensuring compliance to the delisting regulations through diligence, care and professional judgement; the veracity of public announcement, letter of offer and post-offer advertisement; verifiable arrangements for funds by the firms and the disclosure of outcome of RBB process.

• Cooling Off Periods:
Post the voluntary delisting, the cooling off period for re-listing has been narrowed down to three years, except for certain special cases.

• Process Timelines:
The process timelines concerning the initial public announcement by acquirer till the return of shares tendered, have been made strictly on contractual basis for quickening the completion of the process.

The new regulations irrefutably address some core aspects and also emphasizes on incremental improvements addressing some gaps in the Erstwhile Regulations. However, the impact of the changes brought in through the New Delisting Regulations on the success rate of the delisting process is yet to be seen.

Originally posted on www.kpalegal.com on 4th August 2021