In this article, Shamika Vaidya discusses how delisting of shares impacts the shareholders.

Introduction

A Public company grows and carries out its business utilizing public shareholding capital. Equity shareholder is at the bottom of the pyramid and takes up high risk. The primary reason to take up this risk is that the listed companies provide them the opportunity of easy exits, as the shares can be sold in the secondary market. Listed companies have a lot of compliances and the market regulations are strict enough to facilitate safeguarding shareholders’ interests against unfair practices. Whenever a company initiates corporate privatization then the shareholders can be in a vulnerable position and their interests can be at stake since the available market in the form of a stock exchange is taken away.   

Delisting and types

Delisting of securities means that the stock of the company will no longer be traded on the stock exchanges and the company will be a private company. The delisting procedure is governed by the SEBI (Delisting of Equity Shares) Regulation,2009.  

Compulsory Delisting

Non-compliance and omission to any of the regulations as set in the listing agreement can get the company delisted as a penal measure. Rule 21A of the Securities Contract Regulation Act along with Securities Contract (Regulation) Rules, 1957 lists down the reasons for a company to be compulsorily delisted:

• If the company has incurred losses for three consecutive years and has a negative worth.
• If the trading of the company has been suspended for over 6 months.
• If the shares are traded infrequently for the last 3 years.
• The company director(s) or promoter(s) have been convicted for not less than 3 years due to failure in complying with regulations of the Depositories Act, SEBI Act, and the company has incurred a loss of not less than Rupees 1 crore.

Voluntary Delisting

Whenever the delisting is initiated by the company by following a due procedure than it is voluntary delisting. Reasons for delisting could be as follows:

• It is possible that the company is about to be taken over by an acquirer who is likely to hold a higher stake than permissible by the minimum public shareholding norms. In such a case, it will be taken private, since the acquirer would prefer to have flexibility in the operations and also do away with the payment of a listing fee to the stock exchanges.
• In the initial liberalization phase, the FDI policies prevented 100% foreign ownership however subsequent opening of 100% FDI in sectors, preference was given to holding wholly owned subsidiary in India and therefore MNCs’ started de-listing.1
• Many companies may find it difficult to comply with the regulations for the listed companies and may get themselves delisted.

Not delisted from all stock exchanges

Where a company is listed in multiple stock exchanges it can also de-list itself from any one of the stock exchange and continue to trade its shares on the others. In such a case there is no exit opportunity given to the shareholders as the shares continue to be traded at other stock exchanges, however, the stock exchanges where the shares are traded need to be recognized with nationwide trading terminals like the National Stock Exchange and Bombay Stock Exchange.

Indian Depository Receipts

Regulation 80(1) of the Listing Obligation and Disclosure Requirements mentions that IDR can be delisted however a fair and reasonable treatment have to be given to the shareholders and comply with SEBI guidelines.

Resolutions from shareholders

Out of the many other compliances the company has to obtain, regulation 8(b) requires a prior approval of the shareholders by special resolution through postal ballot, the number of shareholders for the delisted company should be double the number of shareholders against it. This makes sure that only when the majority of the shareholders are in favor of the delisting then it can be initiated.

Impact of Voluntary Delisting

Regulation 4(5) states that the acquirer or promoter group should not employ any scheme or engage in any scheme or transaction to defraud the shareholders in connection to the exit opportunities.  

Since the shares will be delisted, the shareholders have to be given an exit opportunity in terms of Regulation 5. For this purpose, a price has to be arrived at in accordance with regulation 14 and the shareholders will surrender their shares in return for this price.

Regulation 17(a) of the Delisting Regulation requires that the promoter must be holding 90% of the total issued shares post the buy-back of shares against the delisting offer.

Now, if the share price arrived at is too low, enough shareholders will not surrender their shares so that the post buyback holding of the promoter amounts to 90%. In such case, Regulation 16 mentions that the promoter is not under any obligation to accept the price determined by the reverse book building process and he can release the money deposited by shareholders and close the account. However, in that case, he will not be able to proceed with the delisting.

The shareholders didn’t find the value arrived through the valuation to be satisfactory with regards to investment and opportunity cost and on soliciting views of stakeholders and Primary Market Advisory Committee later the Reverse Book Building Pricing (RBBP) a method to discover the price was introduced which ensures investors’ participation.It is a like goodbye bid. The company has to appoint a Merchant Banker and the floor price has to be detailed to the shareholders who can bid, the tender price being equal to or more than the floor price. The final offer can be decided after the offer period is closed for the buyback of shares. However, according to the notification issued by SEBI, the promoter may be able to proceed with the delisting by giving a competing offer instead of rejecting and making the whole process futile. It must be noted that the competing offer must be lucrative enough for the shareholders to surrender their shares.

In the case of Ricoh India an arm of Ricoh Asia Pacific Pvt Ltd, it had offered a price of Rs. 120 per share, as it looked forward to delisting itself from the stock exchange as its holding company looked forward to buying 26.4% stakes in its arm from the public shareholding. The maximum number of shares for successful delisting offer was tendered to Rs. 225 per share. This was rejected by the promoters and therefore was not successful in delisting itself from the stock 2exchanges 3

AstraZeneca Pharma Limited planned to go private and therefore announced a delisting which was approved by the shareholders however was pending for approval from two stock exchanges. A year before the announcement the company announced an Offer for Sale and was subscribed by six Foreign Institutional Investor, all of the end users being related, at a price far low than the previous day closing. For the resolution to be passed for the delisting all the shareholders with the FII approved it and there was the possibility of concerted action. SEBI stepped in and ordered a close scrutiny into the matter. The company failed to delist itself twice prior. A plea was filed by two minority stakeholders in the High Court demanding a stay on the delisting process.

The term oppression and mismanagement are not defined by the Companies Act, the shareholders can file an application in NCLT under S.241 of the Companies Act,if they are of the opinion that there is manipulation in the floor price or any other process that is against their interest  the tribunal has the power to pass an order under S.242

The Companies( Prevention of Oppression and Mismanagement)Rules,2016 mentions the process and the form to be filed and the manner of filing it.   

Not just India but shareholders across the globe raised an objection when they were discontented with voluntary delisting, below are few of them –

1)Protests by the shareholders in the UK when Vedanta had announced its decision of getting delisted from New York Stock Exchange.

2) Vard Holdings delisting from Singapore Stock Exchange

3) 7up’s delisting from the Nigeria Stock Exchange.

Cadbury delisted in 2005 with successful buying 90% stake, however around 8419 minority stakeholders holding around 2.4% stake opposed the price that was being offered and took it ahead to the High Court. The price offered by the company was 1340 Rs per share which was then increased to 1743Rs but didn’t help in placating the agitation of the shareholders who demanded the price per share be 2500 and valuation be done by the (DCF) Discounted Cash Flow method, the Bombay High Court asked the company to pay 2014.50 per share.

There is a possibility of the share prices going up after the announcement of the delisting as the exit prices provided to the shareholders is high in most of the cases. In case of Patni Computer System that is a subsidiary of iGate Corporation, there was a hike of whopping 22% in the price of shares of the company. However, it is not always necessary that the shares may go up. In case of Mahindra Satyam, the shares dropped down to 24% after it announced to delist from New York Stock Exchange.4

The following is certain concerns raised by the shareholders before SEBI-

1. There is a possibility of shareholders forming groups and bidding exorbitantly. Price can also be influenced by the new shareholders who buy them from the secondary market.
2. In order to get the prices to lower the promoter may divest stake prior to the delisting to known people who can influence price by bidding less.
3. The only floor price is indicated and the recommendation set forth was providing of the price band
4. Reverse Book Building Mechanism is only used in India, no other company uses this method of valuation.
5. Book Value is higher in some instances and the same is not considered by the Reverse Book Building Mechanic
6. Arbitrageurs/speculators can influence the price discovery by bidding at unrealistic prices. (See link here)

The company can take advantage of the depressed markets where the stocks go down and try to have a raw deal with the equity stockholders who are desperate an exit. The company take advantage of the undervaluation and with the lower valuation buyback the shares. (See link here)

Essar oil created a history in corporate privatization after a failed attempt to delist the company. The price discovered through the reverse book building process was Rs. 262 per share which is 80% higher than the floor price that was Rs. 146 per share. However, the shareholders expressed disappointment as the approval from them was obtained before the Rosneft deal, where a considerable stake would have been sold to them and would have triggered the Open offer.5

Impact of compulsory de-listing on the shareholders.

Practically all the research studies in the developed markets have pointed out that the market prices in “going private” transactions are an imperfect proxy for arriving at the fair value of the stock6

Around 4,200 companies have been announced by SEBI to delist compulsorily due to non-compliance.    

Regulation 23 of the delisting regulation says that in a company that has to be compulsory delisted, an independent valuer has to be appointed who evaluates and determines a fair value of the delisted shares, the promoters are obliged to acquire the shares from the shareholders at the price determine, unlike voluntary delisting. However, the shareholders can retain their shareholdings if they have a hope of company getting relisted and can be a part of the company and keep receiving dividends and annual statements, or sometimes even the company negotiates with the shareholders.

SEBI has directed that when a company is compulsorily delisted then the company and the company’s fair value is positive then it should not transfer equity shares of the promoters and the corporate benefits like dividends, bonus shares should be frozen unless exit option is provided to public shareholders. Promoters and whole-time directors are who fail to provide an exit to the shareholders would be barred from raising investment or taking up board positions.

Shareholders of the company having stressed assets

Many listed companies are going through the insolvency proceedings, SEBI amended the Delisting Norms stating that the delisting procedure will not apply to the companies pursuant to the resolution plan under the Insolvency and Bankruptcy Code. The price will be in accordance with the procedure laid down in the resolution plan. However, the shareholders shall not get the exit price less than the liquidation value with regards to the priority as mentioned in Section 53 of IBC and is decided by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations,2016.

The notification also stated that the public shareholders will receive the same exit price that has been given to the promoters or any other class of the shareholders. However, this also means that if the promoters are not getting anything the shareholder shall also not.7  

Conclusion

Some shareholders take the delisting in a negative way due to lack of knowledge on the valuation while it is taken as a golden opportunity by other shareholders as the exit price is higher. It may be possible for companies to manipulate the prices, however, SEBI interferes wherever needed and there is a constant effort to bring the best provisions through recommendations, new notifications, and amendments.

Endnotes

1.  Investment Banking Concepts, Analyses and Cases 3rd Edition by Pratap Giri S

2.https://www.livemint.com/Money/t921XeJQfYiKRBK6yRYmYK/AstraZeneca-delisting-plan-faces-opposition.html   Last updated on July 14 11.48 IST AstraZeneca delisting plan faces opposition

3.https://www.business-standard.com/article/markets/ricoh-india-tanks-20-on-failed-delisting-offer-114061700327_1.html Last Updated on June 17, 2014, 11:28 IST Ricoh India Tanks 20% on failed delisting offer

4.https://economictimes.indiatimes.com/tender-or-hold-what-to-do-when-a-stock-delists/articleshow/10968157.cms  Last Updated: Dec05 2011IST Tender or Hold? What to do when a stock delists

5.https://www.thehindubusinessline.com/companies/essar-oil-creates-history-with-largest-delisting-offers-26280-share/article8045096.ece Dec 30, 2015, Essar oil creates history with the highest delisting of Rs. 262.80/share

6.  https://www.thehindubusinessline.com/iw/2002/08/18/stories/2002081800390700.htm Delisting: What is a fair price
7.  https://www.bloombergquint.com/insolvency/insolvent-companies-sebi-makes-way-for-easier-delisting  Last Updated: June 05 2018 Insolvent Companies: Sebi makes the way easier delisting