Sebi moots alternative to reverse-book building process, changes to voluntary delisting norms

Currently, the floor price is calculated based on parameters given in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 or Takeover Regulations.

After Chairperson Madhabi Puri Buch reiterated that the regulator did not want "Abhimanyus" in the market in the last press conference, the Securities and Exchange Board of India (Sebi) proposed changes to voluntary delisting norms, including giving a fixed-price mechanism as an alternative to reverse-book building (RBB) process.

Buch had reference Abhimanyu to speak about entities who have entered the market but feel unable to get out of it.

The consultation paper released on August 14 had other suggestions on the delisting norms including reviewing the threshold to make a counter offer, and reviewing the calculation of the floor price and the date that determines the floor price.

The paper was released after the sub-group of the primary markets committee, constituted on December 18, 2022, and chaired by Keki Mistry, gave its recommendations.

Also read: Delisting norms| Fixed-price model could be riskier for promoters: Ex Sebi ED Pratip Kar

The sub-group has suggested certain alternatives to the reverse book building process, including an option to the acquirer to delist equity shares of the company at a fixed price.

The consultation paper added, “It was also discussed that the fixed price route will give acquirers and the shareholders certainty with respect to pricing of the delisting offer. This would help shareholders decide upfront whether to participate in delisting process or not at the given price. This could also benefit an acquirer in arranging funds for such delisting offers as the price at which the exit offer will be made is known well in advance. It was also deliberated that by providing fixed price for delisting, the speculation that emerges pursuant to the announcement of delisting may be minimized.”

The proposed delisting mechanism would be permitted only for those companies whose shares are frequently traded under the Takeover Code.

The consultation paper added, “Further, such delisting offer would be subject to the following conditions: (a) the fixed price offered by the acquirer shall not be lower than the floor price as determined under the Delisting Regulations; and (b) the delisting offer shall be successful if the post-offer shareholding of the acquirer along with the shares tendered by the public shareholders, at the price offered by the acquirer, reaches 90% of the total issued shares of the company.”

Under the current system, the exit opportunity is required to be provided by the acquirer at a price that is discovered through the reverse book building process.

“The Delisting Regulations permit an acquirer to make a counteroffer only if, upon completion of the reverse book building process, the aggregate post-offer shareholding of the acquirer along with the shares tendered by the public shareholders reaches 90% of the total issued shares of the company,” said the consultation paper.

With the threshold set so high, it may lead to a scenario where majority of the public shareholders have tendered their shares and are in favour of delisting, but the delisting offer fails since the required thresholds are not met. Therefore, the sub-group has suggested lowering the threshold.

Their suggestion: “If the discovered price is not accepted by the acquirer or if the cumulative post-offer shareholding of acquirer fails to reach 90%, the acquirer will have the option to make a counter-offer if the bids received are higher of: (a) the difference between the acquirer’s shareholding and 75% of the total issued shares of the company; and (b) 50% of the public shareholding.”

The paper has suggested a way to determine the counteroffer price.

Currently, the floor price is calculated based on parameters given in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 or Takeover Regulations.

The consultation paper stated, “The definition of floor price under the Takeover Regulations was drafted in the context of open offers where companies will continue to remain listed. The sub-group discussed the need to define “floor price” separately for delisting offers under the Delisting Regulations. Revised parameters were proposed to ensure that the floor price accurately reflects the value of the equity shares of a company.”

It added, “the sub-group also proposed an additional parameter for determination of the floor price to safeguard the interest of the shareholders i.e., “Adjusted Book Value”. It was reasoned that in case of a delisting offer, since the company does not continue to remain listed, it would be appropriate to take the fair market value of the assets of the company into consideration while determining the floor price.”

Different mechanisms have been given to determine floor prices of frequently and infrequently traded shares.

Also read: What is driving Sebi to review the reverse book-building process?

As of now, the reference date to calculate the floor price is the date on which the stock exchanges are required to be notified of the board meeting in which the delisting proposal was considered and approved.

The paper noted, “The sub-group noted that there could be a risk of substantial and abnormal trading activity in the shares of the company during the period between the date of the initial public announcement or the date of the prior intimation to the stock exchanges of the board meeting in which the delisting proposal will be considered, as applicable, and the date on which the stock exchanges are required to be notified of the board meeting in which the delisting proposal was considered and approved.”

The paper added, “Accordingly, the sub-group acknowledged that the floor price should be calculated based on an “undisturbed price”, i.e., the price as of a reference date when information relating to the proposed delisting offer is first disclosed to the public.”