SEBI Watch: Going back to fixed price delisting is not progressive

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.

SEBI Watch: Bring controlling shareholders proposal back on the table

 4-August-2022

The Securities Appellate Tribunal recently ruled against Securities and Exchange Board of India’s orders in the case of New Delhi Television promoters’ loan agreements with Vishvapradhan Commercial and resulting breach of the takeover regulation.

SEBI had earlier held that Vishvapradhan Commercial breached the takeover regulations by failing to make an open offer.

In another order SEBI held that NDTV’s promoters Prannoy Roy, Radhika Roy, and RRPR Holding violated the listing and anti-fraud regulations by not making disclosure on the loan agreements and their terms to the company or stock exchanges. Since it was material and price sensitive information, the investors and board of NDTV were deceived and the acts of the three promoters were, therefore, fraudulent, SEBI held in its order.

The SAT had combined the appeals against these two and other related orders of SEBI in the same matter.

Its ruling in the case deals a blow to SEBI’s efforts to get promoters of listed companies to be transparent and upfront about the fetters and covenants on their shares when they borrow money. SEBI must, therefore, appeal against the ruling.

The Tribunal’s interpretation went against SEBI as there were grey elements in the regulations whose interpretation could have gone either way.

At the core of the contentions was the meaning of control and acquisition of control under SEBI’s takeover regulation.

According to the regulation, “control shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable…, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.”

The “in any other manner” provision in this definition applied to the NDTV promoter case. SEBI had rightly held that covenants or conditions in the loan agreement between Vishvapradhan Commercial and NDTV promoters gave the former indirect control over the company.

Further, the clause on the acquisition of control in the regulation specifies that “irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company.”

This would lead one to interpret that a control can be acquired irrespective of whether or not an actual acquisition of shares took place.

But these two clauses became the bone of contention in the case before SAT.

The Tribunal in its wisdom decided that the loan provisions did not result in acquisition of shares till such time that the NDTV promoters didn’t default on repayment of the loan.

It did not accept SEBI’s contention that through the debt covenants Vishvapradhan Commercial had acquired veto rights in 26% shareholding held by promoters and this resulted in the acquisition of control.

It said that so long as the loan remained unpaid by NDTV promoters, Vishvapradhan Commercial continued to have the warrant conversion option, the purchase option, and the call option, under the call option agreements.

“It is a settled position of law that when there are options with convertibility, unless such options are exercised, the obligation to make an open offer…is not triggered.”

SEBI must, however, not treat this interpretation as settled since the complexities in the shareholding structures of companies have gone up significantly and some of these are designed to side-step the regulations.

In fact SEBI must reconsider the proposals made in a consultation paper in May 2021 that called for replacing the promoter and promoter group concept with the concept of controlling shareholders and persons acting in concert.

SEBI has not accepted this and other proposals made in the consultation paper.

Investors and other securities market participants are intuitively aware that in an increasing number of cases the real controlling shareholders are not among those listed in the promoter category.

The NDTV promoter case setback must motivate SEBI to accept the path-breaking proposals made in that paper.

SEBI Watch: RIL insider trading case highlights need for clarity in norms

21 Jun 2022

The insider trading regulations of the Securities and Exchange Board of India are one of the key pillars of investor protection.

It ensures that, on a continuous basis, price sensitive information within a company is brewing it is kept under tight wraps till it is made public and all those in the know-how of such information, including deemed insiders, do not trade and profit from it.

Secondly, when the information is required to be made public under the listing and disclosure norms then it is made public for all and not selectively.

These principles were in full play in the order by SEBI on Monday against Reliance Industries Ltd imposing a penalty of 3 mln rupees on the company for not clarifying, on a suo moto basis, upon media reports claiming that Facebook was close to signing a preliminary agreement to buy a multi-billion dollar stake in Reliance Jio.

The information revealed in the news report, without an ensuing suo moto clarification by the company, was clearly price sensitive in nature and its revelation amounted to leakage of unpublished price sensitive information that was known only to select company officials and non-company persons who are considered as deemed insiders under the norms.

Although the company made a formal announcement of the deal a month later SEBI held it accountable for abdicating its responsibility to issue a timely clarification.

The company protested that the stock exchanges did not seek a clarification from it as covered in the listing and disclosure norms and that suo moto clarification provision in the norms was voluntary and not mandatory.

This is indeed the case when it comes to specific clauses in the norms. Reliance Industries had also said, in its response to SEBI’s show cause notice in the case, that there was “constant speculation in the media and on social media platforms about RIL's (Reliance Industries Ltd’s) business and operations, and it would be impossible for RIL to track every news report and confirm or deny the same suo moto.”

SEBI, in its order, was right in applying the overarching principles of the insider trading norms and its connected provisions in the listing and disclosure norms.

But it must address the strong counter made by Reliance Industries that specific clauses in the norms did not cast a mandatory obligation on a listed company to clarify on any and all media reports.

There is clearly a grey area in the regulations and SEBI would do well to amend it to remove the ambiguity.

Reliance Industries also contended strongly that at the time of the initial media reportage the due diligence process was still going on and there were only tentative agreements on valuations. It told SEBI that no credible and concrete information had got created and so there was no obligation on it to clarify.

Listed companies are frequently in talks with entities for striking agreements or deals, and the stage of finality is reached only when the board of the company and the other entity approve it.

Most of the time the talks do not conclude in legally-binding deals.

But SEBI was right in dismissing this point on the ground that any information that is price sensitive, including a listed company’s ongoing talks with other entities for striking deals, came under the scope of unpublished price sensitive information and consequently attracted the application of insider trading norms.

The provisions of the insider trading norms and its connected provisions in the listing and disclosure norms have evolved over the years but there are still some grey areas that need to be tackled.

SEBI Watch: Plug loopholes allowing misuse of preferential share issue funds

13 Jun 2022

A recent ruling by the Securities Appellate Tribunal has put a spanner in the works of the Securities and Exchange Board of India with regard to the latter’s regulatory and enforcement rigours in the rules governing preferential issue of shares by listed companies.

Early this month, SAT ruled against a SEBI order of April that had fined a company, Terrascope Ventures, for a significant deviation from the stated use of funds garnered in a preferential issues of equity shares in 2012.

The sole ground on which SAT allowed the appeal was that the deviation in funds use was ratified by shareholders in an annual general meeting in 2017 by a majority vote.

This ruling by SAT may have adverse ramifications for shareholders if companies manage to get majority votes for ratifying earlier use of funds that was not in line with the stated purposes at the time of a preferential issue.

It opens a pandora’s box which SEBI would find it hard to grapple with. A majority approval is easy for companies where promoters hold stakes of 25-30% or more.

At present, the issue of capital regulations require companies raising funds through preferential issue of shares to specifically state the various purposes for which the funds proposed to be raised by them and get shareholder approval prior to giving effect to the preferential allotment of shares.

SEBI had rightly contended in its order against Terrascope Ventures that the company’s use of funds for other purposes would render the information provided prior to the preferential issue as untrue, misleading and distorted.

This violated the listing regulations, the issue of capital norms and the regulations on prohibition of fraudulent and unfair trade practices in the securities market. It was, therefore, appropriate that SEBI impose penalties on the company, its managing director and another director in the case.

But, given the negative implications for investor rights from SAT’s order, SEBI must appeal the ruling in higher courts.

SEBI also has the option to tweak its regulations on issue of capital and listing obligations to specifically prohibit retrospective shareholder approval of deviation in use of funds raised through preferential issues.

Any misuse of funds raised from issue of shares, even if it is within the ambit of court rulings, will hurt the interests of investors. Existing loopholes in the norms that get exploited by companies in the court appeals must get removed.

SEBI Watch: Client collateral safeguards in place, monitoring now key

2 Jun 2022

From May 2, a major gap in the client margin mechanism that enabled brokers to use excess funds or securities balance in one client to fund a shortfall in the account of another client was plugged. This is a substantial change.

Securities and Exchange Board of India announced this change along with others in a circular in July last year on client level collateral segregation and monitoring by brokers, clearing members and clearing corporations. It was initially scheduled to take effect from Dec 1 but market participants have got SEBI to postpone it.

After the Karvy Stock Broking fraud case came to light in 2019, the issue of client funds and securities misuse has become paramount for the regulators and market participants. The problem in the system was acute as many other cases of broker misappropriating client funds and securities came out in the open.

The underlying weakness in the mechanism of handling of client funds and securities by brokers and clearing corporations for margins and trade settlement purposes came as a shock to many.

But since then the capital market regulator has moved deftly and effected changes aimed at safeguarding client funds and shares.

The most important safeguard to have was that of one client’s funds and shares not getting misused to fund the shortfall in another client or the broker’s proprietary account.

At the same time, since mid-2020, the retail investor participation in cash and derivative markets has gone up exponentially and the need for changes became urgent.

It was leading to demand by some recalcitrant clients on brokers to take care of margin or other shortfalls in their accounts by any means possible. If the broker was not funding these shortfalls from its own funds or securities then it was dipping into funds or securities of other clients.

Broker proprietary account shortfalls also posed similar problems for the client funds and securities.

The changes that SEBI announced in July laid out in great detail on how the fund and securities collateral, including the recently introduced securities pledge and re-pledge for margins directly with the clearing corporation, will be handled at all stages from the client to the clearing corporation.

There is, since May, a strict bar o the broker from co-mingling client funds and securities with each other or with its proprietary account.

Now, if there is a margin or other shortfall in one client’s account, the broker will only be able to fund it from its own account and not accounts of other clients.

These much-needed safeguards are now in place, and credit goes to SEBI on persisting with the change.

But continuous monitoring by clearing corporations and SEBI will still be needed. They will have to be on guard against false allocation of client level margins provided by brokers to clearing corporation, and undue withdrawal of client allocation by brokers without intimation to the clients.

The markets will be safer only if adequate monitoring and enforcement happens.

Even before the Karvy scam took place, the principle of client funds and securities not getting misused by the broker was enshrined in the rules. But the underlying mechanisms were not foolproof to ensure that it was followed all the time.

SEBI Watch: Focus on liquidity impact on IPOs may yield better result

20-May-2022

In a speech in February, the then Securities and Exchange Board of India Chairman, Ajay Tyagi, remarked that the appropriateness of valuation of new-age, loss-making companies coming out with initial public offerings was being debated intensely among stakeholders.

These debates appear to have picked up pace in recent weeks with the IPO frenzy fizzling out in line with the fall in secondary market equity indices.

Even in the case of the large IPO of Life Insurance Corp of India, the government had to bring down the valuation in order for the issue to scrape through.

The post-issue share performance of recent high-profile IPOs such as Zomato and Paytm have disappointed retail investors.

A report in Mint on Wednesday said that SEBI was currently having internal discussions on why recent high-profile IPOs were trading below their issue price. It said that SEBI was also telling IPO aspirants to reconsider their valuations.

Over the last one year, the stock market regulator has strengthened the disclosure requirements by companies in their red herring prospectuses for IPOs, and also tweaked other norms around exit of large shareholders through the offer for sale route.

These changes have mostly focused on the new-age companies.

The debate inside SEBI on IPO valuations is fine but the fact that they are high is known to investors, including the retail and other individual investors. Even anchor investors who are qualified institutional buyers and for whom a portion of the IPO is reserved are not oblivious to it.

The problem is not that of lack of awareness.

Investors, of all size, are flush with funds to invest and desperate for quick returns from listing gains.

For investors, with not enough funds to subscribe into IPOs, brokerage houses and non-banking finance companies have supplied easy money. 

The IPO market started heating up in the middle of 2020. Since the liquidity in the investment ecosystem was near all-time highs at that time the issues were getting subscribed in high multiples and also delivering significant listing gains.

Investment bankers took advantage of this and prodded unlisted companies and their private equity investors to cash in on the IPO boom.

Ultra-short term return-hunting traders are always on the prowl in secondary market trading on the stock exchanges. During periods of primary market boom they get another market to play in.

Retail investors are lured by the promise of high and quick returns.

These factors have played out in IPOs in the last 18 months.

SEBI has done everything in its capacity to improve measures at the level of disclosures on corporate fundamentals. But it has stopped short of measures to control leverage and liquidity in IPO subscriptions.

SEBI must explore measures to curb recklessness in IPO financing by brokers and NBFCs. Such financing is also seen in the pre-listing IPO grey market.

The leverage available to ultra-short term investors is substantially high. The market regulator will not hurt anyone if this is tempered.

Further, the rush for returns has its own rolling mass effect. Retail investors subscribe to IPOs in larger quantity in order to improve their chances of getting allotment and this feeds on itself leading to higher over-subscription multiples.

SEBI must, therefore, review the allotment process to deter such frantic investments. If there is a way to assure a minimum level of allotment to each subscriber it must be quickly implemented.

SEBI must also consider extending the lock-in period for anchor investors. Their subscription in an IPO, before it opens for public investors, has bearing on the latter.

A longer lock-in period will indicate that anchor investors are committed for a longer time and that will provide a better signalling effect at the time of IPO.

Usually, regulators avoid fiddling with valuations in the market. The market must be let free to decide. The demand-supply dynamics may not always be what the regulator wants.

Any fizzling out of issues in the primary market ought not to be the regulator’s worry. Markets ebb and flow. It is a natural cycle.

The market regulator must only ensure that the processes that grease the market ecosystem are not gamed and manipulated.