SEBI Reviews Delisting, But Investors Still Vulnerable
Apr 26, 2004
A perplexing addition to the new guidelines is the compulsory delisting of securities by an order of the stock exchange
By Sucheta Dalal
Investors would be forgiven for thinking that the booming capital market has reduced the stampede of companies to delist their shares from Indian bourses. While that may be partly true, investment bankers say it is the lack of clarity over delisting guidelines that have stymied their plans to go private.
But the process of framing guidelines to permit a delisting procedure that is fair to both companies and investors has been converted into an arduous task by the capital market regulator. The guidelines are being framed, refined and re-worked for over two years now.
In February 2003, SEBI notified delisting guidelines, based on the recommendations of a committee comprising diverse market partici- pants and investors. The guid-elines themselves were notified long after the committee had submitted its report. But they apparently proved to be a non-starter. Investment bank-ers had too many questions regarding their applicability and procedure that SEBI officials were also confused. Consequently, there was almost no delisting by companies after the rules came into force.
I believe that the powerful bull run that commenced in May 2003, just three months after the guidelines were notified, has been partly responsible for this. But investment bankers would have us believe that many companies would have exited if the procedure were simpler and clearer.
Consequently, only one significant delisting (that of Digital Globalsoft) occurred after the listing guidelines were notified. It followed the very ‘reverse book building’ route which has attracted a lot of flak from firms proposing to delist. And its owners paid a price high enough to be acc-epted to retail shareholders. Digital Globalsoft’s management had attracted the regulators’ attention in the Samir Arora insider trading case, and it may have been keener on a swift exit from the bourses.
If companies had hoped that the new guidelines would allow them to escape the ‘reverse book building’ regulation, they will be disappointed. This price discovery process allows all investors a fair say in deciding the price at which a company can delist its shares from stock exchanges. It also ends the take-it-or-leave-it option that companies usually gave their shareholders. A company is allowed to decide a floor price based on a 26-week average traded price, based on which it invites bids from investors to determine a cut-off price at which they will off-er shares to the promoter. The promoter seeking to delist shares has the option of re-jecting the offer if the ‘discovered’ price is considered too high and the shares remain lis-ted. If the number of shares tendered by investors is so small that it does not fall below the minimum listing rule, then exit bid automatically falls through.
A quick comparison bet-ween the new and old guidelines show that the SEBI team has fleshed out its earlier guidelines, clarified procedures and issued specific inst-ructions on how to inform shareholders about the bidding process and exit methodology. It has also exempted firms with less than 50 public shareholders, so long as they write to individual invest-ors and have a 90% consent; but it hasn’t touched the reverse book building recommendation despite pressure to do so.
Certain corporate practices, such as making repeated buy-back offers to sweep up floating stock in anticipation of a delisting, also remain firmly barred. And there are specific in-structions on restoring the minimum-listing re-quirement when the public holding falls below the prescribed limit.
The new SEBI guidelines have also cleaned up some of its drafting imperfections and plugged a few loopholes that existed earlier. For instance, part of the mandate for framing delisting guidelines was to tackle the issue of regional listing. Since companies no longer need to list on a regional exchange or remain listed on multiple smaller exchanges, there was a need to frame exit rules for voluntary delisting.
However, the smaller exch-anges were loath to let go of these companies and give up the listing fees that were often their only source of revenues. A flaw in the earlier guidelines had given regional bourses plenty of room to delay or reject delisting requests. SEBI has now plugged the problem. It has specified that bourses will have to grant permission to delist within 45 days, if the company making the request had paid up listing fees complied with the listing agreement and has no pending litigation (presumably with the bourse or minority investors). Otherwise, stock exchanges would have to explain the delay to SEBI.
An important, but perplexing addition to the new guidelines relates to compulsory delisting of securities by an order of the stock exchange. Since the mandatory delisting, especially on grounds such as non-payment of fees, non-declaration of results or poor disclosures, SEBI has tried make the system fairer to investors.
It says that a firm, whose shares are compulsorily delist-ed, would have to buy back the public shareholding by offering a “fair” price to investors. This ‘fair value’ will be decided by the Ombudsman to be appointed by SEBI, after taking into account provisions of the takeover rules.
Investor associations have long argued that delisting a dubious company only lets it off the hook. And the delisting committee had recommended that the regulator must file a winding-up process against such companies. The SEBI team seems to think that the Ombudsman, when appoin-ted, can resolve the problem. It does not bother to explain if the Ombudsman has the pow-er to enforce its orders. After all, why should a firm comply with an Ombud-sman’s order once it is de- listed? And what happens to investors if the buyback order is ignored?
The report has no answers. But unless the regulator files mandatory winding-up proceedings against recalcitrant companies. it may be simple for them to deliberately attract de-listing by refusing to pay fees or make timely disclosures. Which means that unless companies choose to play by the rules, investors remain almost as vulnerable as they were earlier.