Delisting of Equity Shares

SEBI (DELISTING OF EQUITY SHARES) REGULATIONS, 2009 The Securities and Exchange Board of India (SEBI) has notified the SEBI (Delisting of Equity Shares) Regulations, 2009, “Regulations”, thereby superseding the old SEBI (Delisting of Securities) Guidelines. These Regulations provide three different set of provisions for delisting of equity shares under different circumstances.  The main delisting provision pertains to the voluntary delisting sought by the promoters of a company.  The second delisting provision relates to those circumstances where a stock exchange is as per its guidelines forces a company to delist its equity shares.  The third provision pertains to delisting of small companies. Further, the Regulations also covers delisting from smaller exchanges though the company continues to remain listed on exchanges having nationwide trading terminals. SALIENT FEATURES FOR VOLUNTARY DELISTING The voluntary delisting has been made difficult for the companies listed on Indian stock exchanges. The provisions pertaining to shareholders’ approval, the discretionary power given to exchanges and the minimum equity shares to be acquired at a price determined by the public shareholders are some of such requirements.  A company has to pass a special resolution by postal ballot which shall remain valid for a period of one year. In other words, once the special resolution is passed, the company has to complete all the procedural formalities, eg. taking in-principle approval, setting the floor price, taking final approval of the stock exchanges, within one year from the date of passing the special resolution.  Further, a quantitative requirement has been put for passing of the special resolution whereby the votes cast in favour of the delisting proposal must be at least twice the votes cast against the proposal by the public shareholders.  The company has to seek an in-principle approval from the stock exchange from where it seeks to delist its shares and only after obtaining the in-principle approval can a company comes out with the public announcement proposing the delisting.  A company must buyback the shares so as to either increase its shareholding to 90% or the level of promoter shareholding post offer is the aggregate percentage of pre-offer promoters holding and half of the offer size, whichever is higher. This requirement is irrespective of the level of public shareholding applicable to the company under the listing agreement with the stock exchanges. This means that if the promoters holding is already 90% at the time of seeking delisting, they shall propose to buy back the remaining 10% of the public shareholding and shall have to buy at least half of the equity shares offered (i.e. 5%) to be acquired in order to delist its equity shares.  The buyback from the public shareholders, the company has to provide them the exit opportunity at a price determined by the book building process, or in other words, to be quoted by the shareholders themselves. This price will be higher than the floor price for the buyback which has to be disclosed by the company in a public announcement. LIMITATIONS A company cannot apply for delisting of its equity shares pursuant to  Buy back of its equity shares, or  preferential allotment made by the company; or  unless a period of three years has elapsed since the listing of that class of equity shares on any recognised stock exchange; or  if any instruments issued by the company, which are convertible into the same class of equity shares that are sought to be delisted, are outstanding.  It is not clear whether a company will be required to take approval from all the stock exchanges having nationwide terminals in case it is listed on more than one such stock exchange. MECHANICS  The company to take approval of the Board of Directors and the shareholders;  Applies for in-principle approval from the stock exchange.  The stock exchange to give its approval within thirty days of the application after verifying certain factors, such as, investors’ grievances, compliance with listing agreement, listing fees, etc;  On receiving the in-principle approval, the company makes a public announcement proposing to delist its equity shares from the stock exchanges where the shares are listed.  The company to send a Letter of Offer to its public shareholders within 45 days from the date of the public announcement so as to reach them at least five working days prior to the opening of the bidding period.  The offer shall remain open for a minimum period of three working days subject to the maximum of five working days to enable the shareholders to tender their bids.  On receipt of the bids, the company may not accept the equity shares offered at the price determined by the book building price and proceed to close the offer for delisting by not making the final application to the stock exchange for delisting of its equity shares.  On the other hand, if the public offer is successful and the company makes a final application to the stock exchange to delist its equity shares, the company cannot apply for listing of shares for a period of five years from the date of delisting. SPECIAL PROVISIONS FOR SMALL COMPANIES The new Regulations have come out with special provisions for delisting of equity shares of small companies  where the paid up capital is upto one crore of rupees and the shares are not traded in the one year preceding the decision to delist the shares; or  where the public shareholders are not more than three hundred and the paid up value of the shares held by such shareholders is not more that one crore of rupees. In case the above conditions are met with, some of the provisions related with the voluntary delisting such as approval of the Board of Directors, seeking in-principle approval of the stock exchange, in addition to the following procedures have to be followed by the promoters for delisting its equity shares:  a merchant banker has to determine the floor price for the buy back;  promoters have to write individually to all public shareholders proposing the buy back and indicating the floor price and the basis for arriving at the same;  atleast 90% of the public shareholders consent to sell or continue to hold equity shares even after delisting;  process for completing the buy back is completed within 75 days of first informing the public shareholders and payments are made within 15 days from the date of expiry of 75 days. CONCLUSION The new Regulations fix a number of lacunae and gaps that were there in the earlier Delisting Guidelines. At the same time, delisting of equity shares has been made much stricter and tougher. The requirement of taking in-principle approval of stock exchanges leaves a lot of room and discretion in the hands of stock exchanges to either approve or delay its approval for delisting. Further, providing an exit option to the public shareholders at a price to be determined by them and success of the offer being made dependant upon acquisition of at least half the offer size or increasing the pre-offer holding to the level of 90% are the conditions which make delisting tough. The offer remaining open only for a maximum period of five days is too short a period to generate interest among the public shareholders to come forward to bid for the offer. However, the requirement of filing the Letter of Offer with SEBI akin to filing under the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997 has been done away with under the Regulations thereby removing one step from the various procedures to be complied with.

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