SEBI Watch: Going back to fixed price delisting is not progressive
August 18, 2023
Going by the proposals in the latest consultation paper on delisting regulations review, the Securities and Exchange Board of India is keen on turning back the clock back by 20 years on the issue of public shareholder empowerment and tilt towards facilitating ease of business in the securities market for unlisted and listed companies.
It wants to provide allow an option to listed companies to voluntarily delist by way of fixed price and not just compulsorily have to do reverse book building process as is the case currently. Voluntary delisting happens when a company's promoters or controlling shareholders offers to buy shares from all the public shareholders, and if in the process public shareholding falls below 10% as per current SEBI norm, then they could delist the shares from the stock exchanges.
The reverse book-built route replaced the fixed price route in 2003 when SEBI framed separate guidelines on delisting. Till then delisting norms were specified in an Apr 1998 circular of SEBI where voluntary delisting by a company was allowed only by a fixed price method where average of last six months traded price of the shares determined the exit price.
A closer look at the most vital proposal of doing away with compulsion of delisting by way of reverse book building process only reveals that the move is not aimed at protecting the interests of the public shareholders who invested in the shares of a listed company in good faith only to find that company wanting to get out of the listed market.
"As a part of SEBI’s constant endeavour to align regulatory requirements with the changing market realities as well as to enhance efficiency of the delisting mechanism, a need is felt for a comprehensive review" of the delisting regulations, said the regulator in the latest consultation paper inviting feedback from market participants and investors. The SEBI paper did not specify what the changing market realities were.
The actual unchanging reality is that public shareholders' interests need to be safeguarded from the whims of company promoters or new acquirers taking control. Reverse booking building process gives power to the shareholders to determine the fair price at which the company could take their shares and delist.
A delisting panel report in 2002 had recommended the introduction of reverse book building as it felt it "would provide the transparent, fair and reasonable mechanism for pricing of the shares and which ensures investors’ participation in the whole process of delisting." How could this shareholder empowering measure not deserve its full due now?
SEBI, in its wisdom, has decided to be concerned for the promoters or controlling shareholders wanting to delist and make the process easier and cheaper for them. The market regulator is going by the thinking that artificial barriers to free exit to companies ultimately prove to be entry barriers.
But what does to the core goal of SEBI Act to protect the interest of investors? In removing barriers to companies SEBI is creating new ones for investors, particularly long-term investors. The 2002 delisting committee report had warned that "fixed price exits based on recent market price would lead to higher incidences of delisting during depressed market conditions," and would not " not contribute to good corporate governance."
There is another reason put forward by SEBI which again indicates a definite tilt towards promoters or controlling shareholders of delisting companies. In a recent press conference, SEBI chairperson Madhabi Puri Buch said the regulator had looked at trading data in shares of companies under voluntary delisting and found that speculators were buying shares in bulk and moving up the share price. But she also clarified that the trades by such suspected speculators or operators were not illegal.
The point to note is that SEBI has not disclosed details of any such case in the consultation paper. Without clear evidence that operator manipulation of the reverse book-built price is happening and happening across the board it makes little sense to allude to it and use it a justification against the reverse book building process. Further, even if book-built prices are higher than they would be without the speculative trades it causes no detriment to public shareholders for whom a higher exit price is only better. The only affected party is the company seeking delisting.
The current delisting norms already give the freedom to the promoter or the controlling shareholder to reject the book-built discovered exit price. And if it rejects no harm is done to non-speculator public shareholders who placed bids below the final exit price. The shares would continue to be listed and traded on the stock exchanges giving them opportunity to avail of market-determined price to exit any time. As far as the promoter or controlling shareholder is concerned it already has the option to seek delisting again after six months. The world doesn't end for it either.
The additional fixed price option that SEBI now wants to provide delisting-seeking companies would mean an end to reverse book building. There will hardly be any company which will choose the reverse book building option. The only benefitting party will be the promoter or the controlling shareholder. It certainly won't be the public shareholder.