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This article is written by Bhavna Hemrajani whi is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (including PE and VC transactions) from Lawsikho.

Introduction

Amidst the pandemic induced bearish market conditions, 3 companies such as Vedanta, United Spirits and others have filed for delisting their securities from the respective stock exchanges. One of the most important concerns for the success of a delisting procedure is the ‘offer price’ or ‘exit price’. To ensure that the minority shareholders also have a say in the ‘exit price’ offered by the promoter(s) of the company intending to delist, the SEBI provides for reverse book building. Reverse Book Building (RBB) is basically a process used for efficient price discovery. It is a mechanism where, during the period for which the Reverse Book Building is open, offers are collected from the shareholders at various prices, which are above or equal to the floor price. The procedure for RBB has been provided under Regulation 15 of the SEBI (Delisting of Shares) Regulations, 2009 read with Schedule II. In this article, the author shall be tracing the changes in price discovery mechanism with a special focus on RBB as applicable in India. 

History 

Fixed-Price Regime and SEBI (Delisting of Securities) Guidelines, 2003

In 2003, with the introduction of SEBI (Delisting of Securities) Guidelines, 2003, SEBI first introduced the concept of RBB, and India is the only nation who seems to be following the same as a price determination mechanism in delisting. Before the introduction of these guidelines, the system of the fixed price determined by the promoter was followed. The RBB mechanism was one of the recommendations of the Committee on Delisting of Shares chaired by Pratip Kar. The Committee observed that criticism against delisting comes from the perceived inadequacy of the exit price mechanism currently being used by the delisted companies which fail to adequately compensate the shareholders for the permanent loss of investment opportunity especially if the shares had been offered at a premium price initially. Therefore, as proposed by the Committee, the RBB was accepted as the appropriate mechanism by SEBI as the Committee believed that the same would provide a transparent, fair, and reasonable mechanism of price discovery though the same was not recommended by CII. 

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SEBI (Delisting of Shares) Regulations, 2009

In the initial years when BRR procedure was inserted via the introduction of SEBI (Delisting of Shares) Regulations, 2009, it was the view of a few officials that the RBB process ensures checks and balances on both sides, the investor and the promoter, and it makes sense to continue with the existing norms. However, it was observed that the system had its share of challenges such as disproportionate powers with public shareholders holding a substantial chunk, chances of frivolous bids merging in a possible effort to destabilize the delisting offer, and revision of bids leading to cartelisation in the discovery of the price, besides the full liberty to promoters to reject the price discovered and therefore, stall or hinder the delisting process indefinitely.

Further, it was also observed that the shareholders were grouping together to charge the highest price to tender their shares and take undue advantage of the promoter group. For the shareholders, it was a win-win situation. In any case, where the delisting results to be successful or not, shareholders benefit as it is a trend that the share prices in India tend to rise after the announcement of delisting by a company and further, if the promoter group accepts the offer price which is relatively high as the last resort, the shareholders are at an advantage in any case. 

SEBI (Delisting of Shares) (Amendment) Regulations, 2015

Even after the substitution of the Guidelines of 2003 with Delisting Regulation of 2009, the situation was not found to be satisfactory for the reasons stated above. In a Discussion Paper issued by SEBI in 2014, it was revealed that out of the total 38 delisting offers made after the coming of the Regulations, 2 of them failed due to rejection of price. One of the main concerns raised were about the shortcomings of the Book Building system. Therefore, to bridge the gap of shortcomings with respect to the system, a provision was inserted by the SEBI (Delisting of Equity Shares) (Amendment) Regulations, 2015 to increase the participation of shareholders in the RBB system. Regulation 17 ‘Minimum number of equity shares to be acquired’ stated that an offer shall be successful subject to the participation of at least 25% public shareholdings holding shares in the Demat mode as on the date of the board meeting had participated in the Book Building Process. The same acted as a mandate on the shareholders to participate. However, it is to be noted that the same would have not given the actual result until the beginning of the financial year 2019-20 as SEBI had not made it legally obligatory for every shareholder to hold securities in Demat form. The same was implemented from March 31, 2019, and therefore, there were a limited number of shareholders who held shares in Demat form and could participate. Indirectly, the intent to increase the participation of shareholders in the process stood defeated for a few years. 

SEBI (Delisting of Shares) (Amendment) Regulations, 2018

The amendments introduced in 2015 did indeed ease the situation however; there were certain issues such as rejection of price discovered through book building resulting in failure of delisting. Further, the RBB process under Regulation 8 of the Delisting Regulations did not consider the book value of the listed company, and there were instances where the book value was found to be substantially higher than the exit/delisting price arrived at using the RBB process. Through the Amendment of 2018, a provision was inserted whereby the promoters were allowed to propose a counter-offer to the public shareholders. This was aimed at increasing the success rate of those delisting offers which failed because shareholders offered an exorbitant high exit price. It is pertinent to note that counter-offer proposal is restricted i.e. it cannot be lower than the book value of the listed company for the following reasons:

  1. Book value price is not always an accurate representation of the company’s valuation and therefore, shall not be beneficial for respective parties in different cases. 
  2. Offering an additional floor price in the form of a counter-offer may fail also as counter-offer is not necessary has to be accepted and once again there may be a deadlock between the promoter and public shareholders which shall put a halt on the delisting procedure. 

The process of delisting in accordance with the book-building process has allowed various instances of price manipulation between promoters and shareholders or related parties of the promoters. In a recent settlement order, the SEBI fined ECE Industries Limited of Rs.   25,50,000/- on being found guilty of indulging in a fraudulent and manipulative scheme to make the buy-back of shares successful. Through the investigations, it was revealed promoters of ECE Limited delisted with the help of parties related to them who drove down the price discovery in the bidding process. In another instance, SEBI found AstraZeneca Pharmaceuticals AB Sweden, after previous 2 unsuccessful delisting processes, to have organised a similar scheme. In this case, the end subscribers of the minority shareholders i.e. Elliot Group tried to exercise their majority amongst the minority interest to influence the delisting price in a detrimental manner. These two recent cases reflect the loopholes in the system which require immediate attention.

Delisting during a pandemic

The pandemic has caused uncertainty and volatility in the stock exchange market of India. Further, the companies have sustained losses due to disruptions and stoppage in the work pursuant to the nationwide-lockdown imposed from March 24, 2020. Such circumstances have made listing costlier for many companies and increased their chances to any hostile takeovers which are plausible due to the continued listing with under-valued stocks. Taking advantage of the trading of shares at low prices, three companies have already decided to delist the shares at a low-cost.  

One of the companies Vedanta Limited has been called “opportunistic” by advisor firm Institutional Investor Advisory Services. However, the firm also called out the directors of the companies on fixing the base price low at Rs. 87.50 when the floor price was Rs. 87.25. The RBB shall commence on the basis of the base price. Now, it shall be interesting to see the price offered by shareholders and if the same is accepted by the promoters. It has also been observed by Fitch Ratings that delisting may negate the benefit of privatisation of the companies and reduction in compliance requirements as debt instruments are being used as the mechanisms to purchase the shares from the public shareholders. Though Fitch Ratings has said that in case of delisting of Vedanta shares through debt instruments, it may enhance the overall leverage of the group which depends on the final price arrived at after the RBB has been applied.                                                                      

Conclusion

The Reverse Book Building is a mechanism provided for capturing the sell orders on online basis from the shareholders through respective Book Running Lead Managers (BRLMs) which can be used by companies intending to delist its shares through buy back process. This system of price discovery is unique to India only. The majority view of the SEBI officials is that the procedure is transparent and fair to ensure an equitable division between the promoters and public shareholders. However, there is a certain per cent of public shareholders who aren’t aware of their responsibility to participate which puts a certain class of public shareholders in charge. To ensure full success of the procedure, there must be steps taken to educate the shareholders as the mere insertion of a legal provision is not enough to achieve the goal. The system shall be an evolving provision to keep any other loopholes and it shall be the duty of SEBI to ensure no party is left at an advantageous position over the other.  


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