Doshi: 5 years and only 38 de-listings. Is it that Indian companies love being listed or hate the de-listing process? Well, the good news is that SEBI has amended the 2009 de-listing regulations. The process is now speedier, M&A friendly and scam proof… or is it? To discuss the De-Listing of Equity Shares Amendment Regulations, 2015, Menaka Doshi is joined by Deutsche Bank’s Sanjay Sharma & Kotak’s Sourav Mallik.
Sanjay Sharma, MD – Equity Capital Markets - Deutsche Equities India
Sourav Mallik, Senior ED & Head – M&A, Kotak Investment Banking
Doshi: We will test those three grounds. The timelines definitely have become shorter. So this is a speedier process. As for M&A friendly allow me to list all the changes that have taken place to test whether it has become more M&A friendly or not.
DE-LISTING REGULATIONS AMENDED!M&A Friendly!
Earlier: Only Promoter could announce de-listing offerNow: Acquirer can also announce de-listing offer
DE-LISTING REGULATIONS AMENDED!M&A Friendly!
Earlier: Acquisition→Open Offer→Meet 75% limit→De-listNow: Acquisition→De-listing offer
DE-LISTING REGULATIONS AMENDED!M&A Friendly!
Floor Price: Same method as in Takeover Regs
Final PriceEarlier: Price at which maximum shares tenderedNow: Price at which 90% shareholding reached
DE-LISTING REGULATIONS AMENDED!M&A Friendly!
Floor Price: Same method as in Takeover Regs
Final PriceEarlier: Price at which maximum shares tenderedNow: Price at which 90% shareholding reached
DE-LISTING REGULATIONS AMENDED!M&A Friendly!
Earlier Now90% shareholding 90% shareholding OR & 50% public shareholding 25% public shareholders participate
Earlier, only a promoter could launch a de-listing offer. The amended de-listing regulations now allow an acquirer to do so as well. The acquirer shall declare upfront his intention to delist and instead of launching the mandatory tender offer can launch a de-listing offer. The method to determine the floor price is now the same as in the takeover regulations and the final offer price is the price at which the promoter or acquirer reaches 90 percent shareholding. A de-listing offer is successful if the promoter or acquirer gets 90 percent of all issued share and at least 25 percent of public shareholders participate in the book building process.
Mallik: That is a great change that has been made by Securities and Exchange Board Of India (SEBI) and this was one of the two recommendations of Takeover Regulations Advisory Committee (TRAC) which had actually not been carried out by SEBI when they changed the takeover regulations. So in that context it is a great change. It allows the acquirers who actually have the intention to pose the acquisition go ahead and do a de-listing, to do a one step process, to try and see if they can delist the company albeit through the existing processes and pricing guidelines including the reverse book building process and the price discovery process there and if they are successful at one stage one shot itself delist the company and if they are unsuccessful they have to go back to a tender offer which is the base case scenario as would have anyway prevailed and launch a tender offer whereby the company will continue to remain listed.
Doshi: What happens if shareholders tender shares in a reverse book building process in the de-listing and the de-listing fails and the company wants to or has to do an open offer thereafter, do shareholders withdraw their shares?
Mallik: If the de-listing offer gets completed and it is unsuccessful within two days of that, you have to actually announce that it is unsuccessful and return the shares back to all the shareholders and thereafter the mandatory tender offer is launched along with an interest component for the delayed period and shareholders have to retender their shares in that tender offer process.
Doshi: The good news again here is that amendments have been made to allow for these mandatory offers/de-listing offer to be done on exchange which makes the entire process more efficient in that fashion. Do we need any more details on how it will be done on exchange? Will there be a separate window or is that still work in progress?
Sharma: That is still work in progress. That is an operational issue which the stock exchanges are working on to make that process.
Mallik: From a regulatory intent, it is clear. There are lots of operational issues here which there has actually been active dialogue with stock exchanges and regulators on this aspect and they are actively working on that. Just to give you an example, there are companies in which there are locked in shares. So, in a tender offer you are allowed to tender locked in shares but, in a stock exchange mechanism how do you tender a locked in share?
So that has again been clarified by SEBI in these guidelines that locked in shares would be tendered in the same mechanism as earlier. So there will be a kind of parallel process going on. Then, if there is over subscription how do you exactly determine which are the shareholders who are going to get shares, who is going to get how many, the order entry mechanism, all of those are minor operational aspects which are being worked out. It is not sticky, it is just a question of operationalising a lot of these things.
DE-LISTING REGULATIONS AMENDED!Scam Proof?
Fresenius Kabi, Astra ZenecaPlaced shares via OFSOFS participants helped de-listing offer succeed
DE-LISTING REGULATIONS AMENDED!Scam Proof?
Earlier Now90% shareholding 90% shareholding OR & 50% public shareholding 25% public shareholders participate
DE-LISTING REGULATIONS AMENDED!Scam Proof?
25% public participation threshold not applicable‘where the acquirer and the merchant banker demonstrate to the stock exchanges that they have delivered the letter of offer to all the public shareholders either through registered post or speed post or courier or hand delivery with proof of delivery…’
Doshi: So there is no disputing that the process has become speedier and that it has become more M&A friendly but what about scam proof. In the past year, companies like Fresenius Kabi and Astra Zeneca were accused of having placed shares with select institutional investors via an offer for sale (OFS) only to be able to buy them back later and facilitate their de-listing. So, SEBI proposed a safeguard that at least 25 percent of public shareholders must participate for the delisting offer to be successful. But bankers argued that public participation averages 5-7 percent and hence the proposed provision was too onerous. While the provision has been retained, SEBI says it will not apply if the acquirer can demonstrate that the offer letter has been delivered to all public shareholders.
Sharma: As you rightly said, 25 percent is a high number for, in terms of number of shareholders to achieve because in the past cases if you see the numbers have been sub-10 percent only. I think the out is that if you have reached out to people, that means it is not the sort of negotiated trade with few investors but you have given that opportunity to everybody. Now, that again is a process issue on how do you demonstrate that it has been despatched and delivered to everybody or not. We will need to look at the registered speed post acknowledgements and give confirmation that yes, it has been given. Of course, that leaves the issues of some of the shareholders who do not have the right address current or are not having the residence as the same place, so those issues would be there and we will need to discuss and figure out a way to get there.
Doshi: But, much better than the 25 percent public participation threshold?
Mallik: Yes, definitely much better than the 25 percent public participation threshold, but of course one must keep in mind that there is another regulatory change which has been made that this will now be done through the stock exchange. So, what that really does is it removes the tax arbitrage that existed. So, as a result of that we anyway would think that overall participation in tender of us delisting offers should actually improve. So historically while averages may have been 6-10 percent, hope fully that number itself should go up. That is point number one. And point number two, I think it is only fair to say that ok everything should be delivered to the shareholder. Now the only question comes that there are, as Sanjay pointed out, logistical challenges; somebody may not be at home, addresses may be wrong. There are enough instances of dividends not being credited to accounts of shareholders; I mean that is money going to a shareholder. So, this is just a letter in that sense. So, the threshold of all may be challenging but we may need to work with the stock exchange and SEBI to demonstrate that good faith attempts have been made to reach out to all and move forward.
DE-LISTING REGULATIONS AMENDED!Scam Proof?
Board of Directors - Appoint merchant banker to do due diligence on de-listing offer - Give data on off-market & on-market transactions by top 25 shareholders in past 2 years
DE-LISTING REGULATIONS AMENDED!Scam Proof?
Board of Directors - Certify that acquirer/promoter has not employed any device, scheme, artifice, fraud, deceit, manipulation to facilitate de-listing - Certify that de-listing is in the interest of the shareholders
DE-LISTING REGULATIONS AMENDED!Scam Proof?
Merchant Banker Appointed by Board - Certify that trading carried out by acquirer/promoter in compliance with securities laws - Certify that acquirer/promoter has not employed any device, scheme, artifice, fraud, deceit, manipulation to facilitate de-listing
Doshi: But, here is what it has been replaced by and I thought this was a master-stroke. SEBI said I do not want to have to an investigate who you placed shares with, why you did that, whether you did that to facilitate a de-listing two years, three years down the line. I am going to put that onus on the Board of Directors of the company. So, now they have put in a couple of new requirements which say that a new responsibility has been cast on the Board of Directors. It must appoint a merchant banker to do due diligence on the de-listing offer. It must give the merchant banker data of on-market and off-market transactions by top-25 shareholders of the company and these are transactions running into the past two years. The Board must certify that the acquirer or the promoter has not employed any device, scheme, fraud, deceit, manipulation to facilitate the de-listing and it must also certify that the de-listing is in the interest of shareholders. Equally the merchant banker appointed by the Board to look into those trades must certify that the trading carried out by the acquirer or promoter was in compliance with security laws. It must certify that the acquirer or promoter has not employed any device, scheme, fraud, deceit, etc to facilitate the de-listing. Master-stroke or death of de-listing, because no merchant banker will sign off on this?
Sharma: No, here is what the difference between due diligence and investigation would come in. Given the data which you will have from the stock exchange is it is only due diligence which you can do and figure out whether prima facie feel there is any misdeed or something which has happened. You just cannot do an investigation based on the information would be available on a public.
Doshi: But you have to certify as a merchant banker that there has been no hanky-panky in this process. And not just you as a merchant banker, the Board has to certify that there has been no hanky-panky in this process based on your certification and that the de-listing is in the interest of shareholders.
Mallik: So, if you split that up into the first two and the third one, the first two is which is basically you are looking at the trading pattern why promoters and other related entities, top-25 shareholders over the certain time-period. So, as Sanjay said, we are going to rely a lot on the actual information that is provided to see whatever there is in terms of, from a diligence perspective, what can be done or cannot be done in terms of, of course, we are also working internally in terms of processes that we can set up to look at this. I think the key challenge may come probably in the third one which is a lot more, actually if you think about it, subjective that is the de-listing in the interest of public shareholders? I mean, that is not a question that can be easily answered even by a Board, by any independent third-party. That is a difficult one. I mean looking at data information, trying to see whether there is any particular action that has been taken by a shareholder on the face of it. That is one part of it. Of course the scope there also is quite wide; it says compliance with any securities laws.
Doshi: That is what the merchant banker has to do.
Mallik: Any securities law is very wide and encompassing in that sense. So, we will have to see what we can evolve for that.
Doshi: So, the honest question I want to ask was that if you were the merchant banker employed by the Board to do this diligence investigation, whatever you want to call it, would you be comfortable signing off on any of these certifications that they have asked for, whether it has to do with the two years of trades by the top-25 shareholders or whether it has to do with the acquirer and promoter being in full compliance with all securities laws? Would you be comfortable signing off on this, no matter how much data you have?
Mallik: On the first two, depending on the amount of information and the processes that we look at, probably we can get there. The third one I do not really frankly have a…
Doshi: The third one has to do with the Board.
Mallik: Yes, but if you look at it, Board is going to ask the merchant banker to provide that as well. How is the Board really going to look at that? So, that remains the key question.
Doshi: Sanjay, are you going to feel comfortable signing off on any of these?
Sharma: If it is this kind of blanket certification, it would be difficult. As I said, it is again a discussion point with the Board and with the regulators in terms of what is something which we can provide.
Doshi: Gentlemen, we have spent the last year debating in public what the new de-listing regulation should look like. The changes are finally here. Would you say, Sanjay, that we are now in a place where de-listing has become more possible, more viable?
Sharma: I would say all these points, yes, are critical. But, the key thing which will make it more feasible to de-list is the basic reverse book-building process because that is too much in favour of the existing shareholders and not a wide set of existing shareholders but a select few – the large shareholders.
Doshi: Are we better off today or worse off or in the same place?
Sharma: I would say we are at the same place.
Mallik: No, I think it is a step forward. But, I think there is still a lot more work still to be done in terms of operational aspects of getting a de-listing done.
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