It is time for SEBI to have a re-look at the current complex maze of rules which make delisting offers and public M&A unattractive. On March 25, 2021, SEBI approved certain amendments to the Delisting Regulations by tightening timelines, requiring independent directors to provide recommendations, allowing acquirers to provide an indicative price, and detailing the role of merchant bankers in the delisting process. Earlier this month, SEBI announced further relaxations in delisting norms for startup companies on the “Innovators Growth Platform” by exploring an alternative to the reverse book building process. Perhaps the time has come for SEBI to also address some of the known reasons behind the limited success of delistings in India.
Market data (empirical data) can serve as a guide for regulatory reforms. Delisting of listed companies or “take-privates” as delistings are popularly known globally have met with limited success in India mainly on account of stringent pricing rules under the Delisting Regulations.
In a delisting offer, price discovery is left to the public shareholders. Reverse book building allows public shareholders to tender their share at a price of their choice above a certain floor price. The price at which the acquirer is able to cross ninety percent of the share capital of the company becomes the final delisting price. It is for the acquirer to then accept or reject this so-called discovered price. This makes the process fairly one-sided. A number of delisting offers have failed on account of exorbitant premiums demanded by the public shareholders through this process which would be far removed from the reality of commercially negotiated “fair price” in an M&A transaction in the same company. In order to soften this one-sided regulation, in 2018, SEBI allowed acquirers to make a counter-offer to the price discovered by the public shareholders. However, by the time the reverse book building process has been completed, a number of investors and traders would have built up positions in the stock in anticipation of a windfall price. Moreover, by and large, the expectation of the public shareholders is set through the reverse book building process and hence it is quite likely that the counter-offer would fail. So far, there is not a single example of a successful counter-offer since the concept was introduced in 2018.
In the context of takeovers of listed companies, with the ultimate intent to delist or take private, the rules are even more problematic. An acquirer taking over a listed company cannot directly delist it without first having to go through the reverse book building process. The price offered by the acquirer to the same public shareholders as per the Takeover Regulations is not deemed good enough to delist the company. Consequently, even if the acquirer manages to reach the ninety percent threshold (which is a pre-requisite under the delisting regulations), but the price discovered by the public shareholders is exorbitantly high and therefore unacceptable, the acquirer is forced to continue with the takeover offer. In such a takeover offer, the acquirer may end up with a response which again takes his holding beyond ninety percent, but then he is forced to sell down shares to ensure that public shareholding in the company is restored to the minimum twenty-five percent.
In several listed companies where the public shareholding is close to the minimum of twenty-five percent, this yo-yo model of first being required to acquire and then being asked to sell is often a deterrent to deal-making – depriving public shareholders as well of an exit at a fair price.
SEBI has historically been reluctant to do away with the reverse book-building process altogether. At the same time, there is a genuine need for providing a seamless path to delisting, by bringing in parity in the pricing requirements between the takeover and delisting regulations. Take private or delisting rules in several other jurisdictions are not as onerous on pricing. If a price proposed by an acquirer is acceptable to a majority of public shareholders, the acquirer should be permitted to delist the company at that price. Price discovery in a commercially negotiated M&A deal would be far more equitable to both sides as compared to a one-sided price discovery process by public shareholders.
SEBI must look at alternatives to the reverse book building process, both in the context of simpliciter delisting offers, as well as takeover, offers that could be combined with a delisting. Reforms with checks and balances of valuation reports and fairness opinions could achieve a balanced outcome for potential investors as well as public shareholders and would be a shot in the arm for taking privates and therefore public M&A in India.
The writer is a Partner at JSA. Views expressed are personal.
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