The market regulator is considering reviewing delisting norms. In a press meet held on July 24, Madhabi Puri Buch, Chairperson of the Securities and Exchange Board of India (Sebi), said that the regulator does not want any Abhimanyus in the market, meaning, participants who are stuck in the market without an exit. As part of that, Sebi was considering amending the delisting norms and Ashwani Bhatia, whole-time member of Sebi, said that companies may be allowed to come up with a fixed price to be offered to shareholders. Currently, the price is arrived at through the reverse book-building (RBB) process.
The RBB process was set in place in 2003, following the recommendations made by a committee headed by Pratip Kar, former Executive Director of Sebi and now a consultant and professor.
In an interview with Moneycontrol, Kar spoke about what led to the crafting of the RBB process and shared his opinions on reverting to the fixed-price process, which was in place before the RBB was implemented.
Also read: What is driving Sebi to review the reverse book-building process?
What led to the addition of reverse book building into delisting norms?
At that time, there was a growing trend of delisting of shares from Indian stock exchanges, especially by multinationals (MNCs) listed on multiple stock exchanges, and it was felt that the trend was likely to continue; and this trend had — you must remember that 20 ago there were regional exchanges — engaged the attention of the public, media and investor associations and caused uneasiness and anxiety among investors. We did not have any delisting guidelines, and Securities Contracts (Regulation) Act (SCRA) and rules were silent on delisting.
I need to mention that the concern was not so much about delisting as such, because to list or not to list is after all a business decision, but about the exit price, which investors felt was unfair to them, especially when there were no guidelines in this regard. The Committee set up by SEBI had examined various options and after consultations, recommended the RBB as a fair, transparent, viable route providing a fair exit option to investors.
However, from what I understand, the market regulator is now considering giving an option (fixed price mechanism) but nothing seems to have been finalised yet... My presumption is that fixed price will be an option given over and above RBB, which will stay.
This must be considered probably because there are people who are cornering shares (by buying more than 10 percent) and holding the promoters to ransom; now that is unfair.
My pragmatic take, after having been with the capital market since 1988, whatever regulations one may bring, it will not be possible to root out all evils. It happens across the world. Regulations may be able to plug gaps for some time, but people will find a way to circumvent rules. This (fixed price mechanism) may prove to be a good step, but one will have to wait and see whether it will be able to root out people who are trying to blackmail the promoter by cornering shares.
Are other investors, who will lose the power to get the best price before exiting, being shortchanged?
I think Sebi is not going to any option that is unfair to investors; that is for sure. I am also not so sure that (the fixed price system) will be unfair to investors… If a promoter is keen to delist, won’t it be reasonable to assume that he will do all the things needed to be done so that his objective is squarely met. In other words, pay a price that clears the market higher than the price determined by the market, (for then only will he get the shares he needs).
What about investors trying to get the best value out of their holding, especially when there could be an information asymmetry that favours promoters? For example, the promoter may know of a deal that is going to be made but the rest of the shareholders may still be in the dark about it.
What you say is in a way true — a promoter will always know more than the market; he is running the business. Say a promoter wants to take a company private sometime in 2024. Only he knows that at any moment. And he or an entity on his behalf begins to buy the shares — today he can still do that… no one can stop him from doing it. But the moment he/she buys a high quantity, then the stock price will rise. Unusual activity in a stock presumably throws up alerts in the surveillance systems of the stock exchanges and the regulator and regulator will start asking questions. If there is a sudden spurt and sustained spurt in activity, without any financial reasons as such, it should set off surveillance system alerts. Also, the fact that the promoter is buying will become market news and investors will look deeper into the company seeking reasons, more so in the case of inactive shares. Therefore, the information asymmetry will be addressed.
Having said that, people are smart. The regulator will go one step and crooks will go one step further.
If there were such corrective mechanisms, why did we change from the fixed-price option to the RBB process?
In 2003, we did not have the processes we have now.
If we had the surveillance system as active as it is now, or the technological advancement that is as exceptional as it is now (then the solution may have been different)… but it was not the case. Besides, as I mentioned, the rationale for delisting was different and there was no formal guideline or process for delisting. Investors were at the mercy of the promoters. Things are different now; we have better surveillance and better and advanced technology.
Won’t promoters be at an advantage with the fixed-price model?
Hopefully, both RBB and the fixed-price model will stay. We have to see which policy the promoters prefer and how many companies will get delisted. There isn’t a big number of companies looking to be delisted, but there are a lot of inactive, listed companies. Since I am far away from the market now and don’t follow it, I do not know how much interest there is in the market for delisting, how many companies are keen to delist, what types of companies they are... Let us wait and read the consultative paper and see how the proposed fixed price mechanism works. Let the child be born first.
But I must tell you that the Delisting Committee not only had wide representation but had very wide-ranging debates and consultations before it reached its recommendations. That always helped SEBI in those days.
What are the risks in offering the fixed-price option?
As I see it, the risk is more for the promoter. The promoter wants to delist therefore he/she must somehow get 90 percent of the holding, at any cost. If the promoter does not opt for RBB and rather offers a floor price with a premium, and if the premium is higher than what the market can offer, then the delisting will go through, but if it is lower than that, then it won’t (there is uncertainty). That’s a risk because the promoter went through the whole rigmarole and then the delisting didn’t go through; now the promoter has to wait till the cooling-off period is over… The promoter can’t keep coming back to the market every five or six months and offer a higher price. RBB can help determine the right price. In the other (fixed-price model), the promoter is essentially paying a premium. Investors don’t have to sell, there is no compulsion.
But what if it is delisted, then investors’ options are reduced…
If the majority of the shareholders are selling, then the price is good, otherwise why will people sell? There might be some detractors saying that they need more… Currently, in a listed company, at least 25 percent of listed companies’ shares have to be available with the public for trading. Therefore, promoters have to get 15 percent of the shareholders to sell (so there is a higher chance of investors getting a fair price, otherwise they will not sell, since there is no compulsion — in a free market if a large number of investors is willing to sell, the price must be right and clearing the market)… Therefore, my take is that it (the fixed price mechanism) will be riskier for promoters.
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