A few years ago, the Securities and Exchange Board of India (SEBI) set up a committee which recommended the 'reverse book building' (RBB) procedure to give minority shareholders a voice in deciding the price at which a company could delist its shares from the stock exchange. RBB ensured a transparent process of 'price discovery' - one at which the maximum number of bids were received. It was democratic. Any company that finds the discovered price too high could refuse to accept it and stay listed. Corporate India disliked RBB from the very beginning. It objected to the very concept of minority shareholders having a voice, instead of allowing the company to decide what is fair payment to throw them out.
Over the years, RBB appeared to work well, because many companies were able to get a fair price and delist their shares; many also refused to accept the discovered price. However, the regulator as well as the finance ministry has wanted to change the rules. SEBI chairmen M Damodaran and CB Bhave have had plenty of differences, but both seem to agree that RBB needs modification. The finance ministry even launched a public discussion on RBB but, funnily enough, nobody has spelt out precisely why they want to change the process.
On the other hand, several companies planning to delist their shares have alleged that one set of minority shareholders dominates the process and even uses the media to demand a high price. These investors buy shares in companies after the delisting plan is announced and then rally forces lobbying the regulator and the media to ensure a profit. Some companies even allege that investors have tried to pressure them into paying a higher price in private deals in return for not participating in the RBB process. According to companies, media sympathy for these investors makes them more powerful.
Indeed, I have regularly received messages from such minority shareholders, usually complaining about management tactics to suppress price discovery. Some of them even present themselves as investor activists and it is, indeed, true that one specific set of investors seems to lobby the minority cause in most cases, where they feel the price is unfair. Anil Jindal of Jindal Securities, based in Delhi, is one regular participant in RBBs. There are others also based in Kolkata and Delhi. I asked Mr Jindal if he buys shares after the delisting is announced in the hope of making a profit through RBB. He was surprisingly candid. He says, “It is true that we buy shares after the announcement; but what is wrong with it? The higher price benefits all minority shareholders.”
He argues, “While I buy a few thousand shares with the motive of making profits, I have taken a risk too. If the large shareholders do not tender their shares or tender them at a high price, which is not acceptable to the acquirer, the delisting will fail and I will suffer a loss.” For instance, Mr Jindal bought shares of Apollo Sindoori at Rs64 (an Aditya Birla group company) after the announcement. Only about 65% shares tendered were accepted; the price dropped to Rs9 and everybody made a loss. This has happened in other cases also.
Now that Madras Aluminium Company Ltd (MALCO) has proposed a delisting, this group of investors is up in arms about the 'maximum acceptable price' of Rs105 that has been set by the company. They argue that it is an ultimatum to shareholders and defeats the purpose of price discovery, where a company can only announce a floor price and not a cap. This is correct, indeed, and is yet another example where the market regulator, SEBI, is sleeping on the job.
But the purpose of this piece is to discuss whether an aggressive bunch of minority shareholders, using the media to state their case, should be allowed to buy shares after the delisting announcement and dictate the exit price?
I was a member of the SEBI committee that recommended RBB and know for a fact that the clear intention was to give existing minority shareholders a say in determining the exit price and to allow them the premium that the promoter group extracts in various forms. It was never the intention to create a trading opportunity for the public. SEBI knows this very well; so do the two national stock exchanges that were represented by their CEOs.Why can't the process be corrected without throwing out the baby with the bathwater?
SEBI can easily prescribe that only those investors who actually hold shares in a company on the day of the announcement will be able to participate in the RBB process. But that would lead to another problem. Former finance minister, P Chidambaram, who loved to introduce deliberately obtuse laws, did not extend capital gains tax benefits to RBB. Consequently, genuine shareholders preferred to exit by selling shares in the secondary market when the price spiked on a delisting announcement. And, the spike happens only because investors like Anil Jindal are willing to speculate on making a profit from the price discovery process.
Allowing minority shareholders a say in price discovery is just and fair, but SEBI needs to correct the process by limiting it to existing shareholders. It must also encourage their participation by getting the finance ministry to extend secondary market tax benefits to RBB.
Why is the regulator unable to fix an obvious problem? Is it because it suits companies to have a slack regulator who does not insist on companies playing by the book and allows them to fix indicative caps or price bands or even cancel the delisting plan after a nice speculative jump has allowed insiders to make a quick buck, as in the TTK Prestige case? In this case, the management dropped the delisting plan after the price spiked from Rs120 to Rs175. Clearly, SEBI has more explaining to do than shareholders who buy shares after the announcement and hope to make a neat profit.