This article is written by Shubham Kumar Singh who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

“The stock market is a device for transferring money from the impatient to the patient”

                                                                                                          – Warren Buffett

Introduction 

On 11th March 2020, the COVID-19 epidemic was declared a pandemic which sent a shock wave throughout the world including the corporate world. When all governments are fighting to tackle the virus, we see a unique trend creeping in the Indian securities market, a staggering 13 companies announced voluntary delisting offers in 2020. Out of these 13 companies, five were successfully delisted, three were unsuccessful, four are ongoing and one stands rescinded. This was unique because generally, it is one or two delisting offers that are made in a year.(i) 

Every stock experiences its dry spell at some point or the other but a patient investor with faith in her informed choice can make the most out of her investment. In the present situation, we could sense that the promoters of these 5 companies took advantage of their public shareholders’ impatience and bought back the shares during this covid-19 induced dry spell. In every delisting and especially in a voluntary delisting, the directors of the company need to make sure that the public shareholders’ interest is protected.  SEBI as the watchdog of the securities market is also obligated to ensure investors’ protection. But are there enough safeguards for public shareholders’ in a delisting process? Is there enough investor education regarding delisting during these unprecedented pandemic times? 

One of the recent examples of delisting offers was that of Vedanta Ltd. which is a subsidiary of England-based Vedanta Resource Ltd.  Although the delisting failed but it did shake the D-street and the securities market. In this article, we will discuss the reasons for the failure with a brief background of the delisting process. In conclusion, we will also discuss the loopholes in the delisting process that SEBI should take note of and fix it as soon as possible. 

What is delisting?

Listing is a procedure where companies list their shares on an official stock exchange like the Bombay Stock Exchange (BSE). Listing of shares provides companies with a platform for market exposure and access to capital and growth. Mainly, it helps to raise funds through the issuance of shares to the public at large. 

Delisting is a procedure to take down listed securities from a stock exchange. A company would delist its securities from a stock exchange either voluntarily or involuntarily. The reason for delisting could be not meeting listing requirements, cessation of operations, bankruptcy, or when a company decides to become private. 

SEBI defines delisting to be:

“The term “delisting” of securities means removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.”(ii)

What is the process of delisting?

SEBI (Delisting of Equity Shares) Regulations, 2009 governs the delisting procedure in India and lays down different conditions and procedures for voluntary and involuntary delisting. Involuntary delisting or compulsory delisting entails the removal of securities from the stock exchange as a penal measure for not complying with the listing agreement. Whereas voluntary delisting is a choice made by the listed company to remove its securities from the stock exchange. Vedanta Ltd. delisting was a voluntary delisting and therefore we shall discuss the voluntary delisting procedure under the code. 

A voluntary delisting could happen for two reasons; First, the company feels that listing stocks did not yield desired results, second, the promoters of the company wants to go private to gain control over the management and decision making because a listed company needs to comply with various procedural checks and reporting obligations before taking any major decision. 

In the present case the relevant chapter IV of the delisting code lays down that the procedure for voluntary delisting:

a)  Shareholder’s Approval: The first step to initiate a delisting procedure is to seek the shareholder’s approval. The resolution to delist shares should be approved by a special majority that is to say 2:1 the majority of public shareholders and voting need to be conducted through postal ballot. 

b) Public Announcement (PA) and Letter of offer (LOF): The company after receiving the shareholders’ approval needs to make a public announcement of such delisting and dispatch a letter of offer with bidding forms to the shareholders. 

c) Bidding Process: The bidding needs to commence within seven working days from the date of making the public announcement and it continues for a period of five working days. In this bidding process, the Promoters along with the person acting in concert should be able to garner 90% of the equity shares of the company otherwise the delisting would fail. 

d) Final Exit Offer Price: The final exiting offer price is calculated after the Reverse Book Building (RBB) process and then the Promoters have an option either to accept it or make a counteroffer within two working days of the discovery of the final exiting offer price. 

e) Post Bidding Announcement: Within five days of the completion of the bidding process the company needs to make an announcement declaring the success or failure of the delisting process. 

f) Payment: In a case where delisting was successful, the company needs to pay the consideration within ten working days.

g) Final application: Finally after making the payment an application to delist the securities of the company, has to be made to the stock exchange and upon approval of the application the company would stand delisted.(iii)

Why did Vedanta Ltd. delisting fail?

Vedanta Ltd. launched the Reverse Book Building Process on 5th October 2020 and the floor price was set at INR 87.25.(iv) As per the rules of delisting the Promoters of Vedanta Ltd. were required to garner an offer for 134 crore shares of the company but they could only get 125 crore shares. This number of 125 crores was less than the threshold of 90% therefore the delisting failed. Although in the earlier records, the company did receive offers of over 137 crore shares but in the final roll out it could not reach even the threshold of 134 crores.(v)

What is a reverse book building process?

The Reverse Book Building or RBB is the process to discover the final exit offer price. Initially with the letter of offer Promoters communicate an Indicative Offer Price (IPO) which was the floor price in the present case that is INR 87.25. The floor price is the minimum price that the promoters need to offer to the public shareholders and is calculated according to the delisting regulation. The shareholders are free to bid at IPO price or above. The final exit price would be the price at which the Promoters can garner 90% of the equity share from the public shareholders. The final exit price after being discovered can be either accepted or rejected by the Promoters. Promoters then will have two working days to make a counteroffer. In the present case, Promoters could not even reach the final exit price as delisting failed in the bidding process only. 

Enigma of unconfirmed bids

Many experts pointed out that the reason for the discrepancy was unconfirmed bids by the foreign shareholders. Around 12.3 crores bids were unconfirmed which played a substantial role in stalling the RBB process.(vi) The foreign shareholders hold their shares through a custodian but custodians are not allowed to trade in the secondary market therefore brokers come into the picture and they bid on behalf of the custodians. The glitch was found in these bids when brokers were not able to get it confirmed by the custodians and therefore the company was not able to reach its desired percentage of ninety. 

The mystery of these unconfirmed bids is yet not clear because the SEBI delisting regulation does not mention anything about unconfirmed bids nevertheless the brokers are allowed to make a bid subject to confirmation of the custodians. 

Conclusion 

In this state of the pandemic, there will be a dip in the valuation of companies and smart businesses would try to make the most out of it. There is no strong legal framework to protect the investors and therefore we need to elevate the state of investor awareness and education. This will help public shareholders make an informed decision whenever an offer in a delisting process is made. Vedanta’s delisting case is a glaring example of a lack of investor awareness. During the tendering period, Vedanta’s shares had a low market price of Rs. 110, even then around 42 lacs equity shares were tendered at Rs. 90 or less.(vii) This raises a big red flag for SEBI as no sane shareholder would tender her shares at such a discount. 

SEBI as the watchdog of the securities market should plug certain gaps in the delisting regulation and market practices in a delisting procedure. It can start with probing this mystery of unconfirmed bids and ensure that only the bids which are confirmed by the shareholders are allowed to be placed and no unconfirmed bids are entertained. It is the need of the hour to make the delisting procedure foolproof and robust so that it serves the interest of various participants in the capital market and especially ensures investors protection.

References

(i) https://www.cyrilshroff.com/wp-content/uploads/2020/11/Report-on-Delisting-Deals-Current-Trends.pdf

(iii) https://www.sebi.gov.in/sebi_data/faqfiles/apr-2018/1522833194043.pdf.

(iii) https://www.sebi.gov.in/acts/delisting2009.pdf. 

(iv) https://www.bloombergquint.com/business/vedanta-delisting-vedanta-promoter-crosses-required-90-threshold. 

(v) https://indianexpress.com/article/explained/explained-how-does-delisting-work-and-why-did-vedanta-fail-at-it-6725062/.

(vi) https://www.sesgovernance.com/pdf/home-reports/1602520861_Vedanta-Delisting-Failure.pdf.

(vii) ibid. 

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