The current situation caused by the COVID-19 pandemic is unprecedented and several listed companies have been under-valued due to the sharp fall in stock prices compared to the beginning of 2020.
This volatility has seen a rush of delisting announcements including from companies on the Nifty 50 and subsidiaries of multinational corporations.
While there could be many reasons for delisting, the current pandemic has caused an uncertain business environment, market volatility and continued cost of regulatory compliance, thereby presenting voluntary delisting as an option for some promoters.
Voluntary delisting is a strategic move as part of which a company decides to remove its own securities from stock exchanges.
Rationale for voluntary delisting
The volatility in stock prices caused by the COVID-19 pandemic has offered an opportunity to certain promoters to regain complete control over their companies at a reduced cost.
Continued listing exposes certain companies with under-valued stock prices to potential hostile takeover.
For multinational companies listed in their home countries or other important financial markets, a continued listing in India may not have much of an attraction and a falling rupee and low stock prices offer them an opportunity to delist at a good value.
Because of the delisting, they can avoid Indian securities regulations and streamline their business operations in the country.
Further, maintaining a listing status generally involves various ongoing costs of compliance.
Delisting provides companies the strategic and financial freedom to undertake restructuring, and utilise cash flows for group-level activities without increased scrutiny from public shareholders and the capital market regulator Securities and Exchange Board of India (SEBI).
Exit opportunity and pricing mechanism
If a listed company proposes to voluntarily delist itself from all stock exchanges, the regulations require that such a firm should provide the public shareholders with an exit opportunity.
The price discovery process for purchase of shares from the public shareholders under delisting regulations only requires the promoter to mention a floor price without prescribing a maximum price.
The process does not comprehensively consider other aspects which could influence the delisting price.
The delisting price is then determined through a reverse book-building process of bidding and the final offer price is determined as the price which takes the shareholding of the promoter along with the persons acting in concert with the promoter to 90% of the total issued equity shares.
Although the promoter may not accept the offer price and may make a counter offer (which may not be lower than the book value of the company), the dependency upon public shareholders for reverse book-building may create a scenario where the discovered offer price scuttles the economic feasibility of the delisting.
Additionally, if a large number of public shareholders consists of institutional investors or high net worth individuals, lobbying or private transactions may swing the offer price adversely.
Manipulation of delisting process
Engagement with third parties, including public shareholders, may result in allegations of collusion and manipulation and the SEBI has taken a strict stance against the use of such mechanisms.
In April 2020, following an investigation in the matter of trading in the shares of ECE Industries Ltd, the SEBI, pursuant to a settlement order, imposed a fine of Rs 25 lakh on each of the promoters (and entities connected with the promoters) on the basis that ECE had delisted with the help of external parties who had driven down the price.
In another recent order issued on June 5, 2020 relating to a proposed delisting of shares of AstraZeneca Pharma India Ltd (AZPIL), the SEBI censured AstraZeneca Pharmaceuticals AB Sweden, the promoters of AZPIL, and the Elliot Group, for attempting to employ a similar collusion.
Role of public shareholders
Regulations provide for a high threshold for successful delisting and public shareholders enjoy substantial rights to control the delisting process.
One of the rules says that an offer for purchase of equity shares will be considered successful only if the post-offer promoter shareholding, along with persons acting in concert, reaches 90% of the total issued shares.
Also, the delisting offer needs prior approval of shareholders by way of a special resolution, with the number of votes cast by public shareholders in favour being at least twice those against it.
Accordingly, the role of public shareholders in approval, price discovery and the entire voluntary delisting is extremely critical and can at times derail the process.
Role of the board of directors
While the regulations require the board of directors to certify that delisting is in the interest of the shareholders, they do not require a committee of independent directors to provide reasoned recommendations to the offer unlike the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.
However, directors have fiduciary duties towards the shareholders.
Given that a voluntary delisting offer involves an offer by the promoters, the directors and, in particular, the independent directors, should consider the interest of minority shareholders at the time of approving any voluntary delisting offer from the promoters.
Difficulty of minority squeeze-out
If the intent of promoters looking to delist is also to go private, a successful delisting at the end of which promoter holds more than 90% of the share capital may not completely squeeze out all minority shareholders.
The promoters may need to take additional steps to squeeze out the remaining minority shareholders that may add to time and cost of completing the process to privatise the company.
Conclusion
Voluntary delisting is an extreme step that may be influenced not just by the prevailing market price but may be part of the strategy of the company to tackle the current business environment.
In order to ensure continued viability of companies during the COVID-19 pandemic, the Indian government as well as SEBI have stepped up their regulatory measures to provide some reprieve to companies.
All such steps may ease the burden on promoters and listed companies and promoters should consider all options before taking the extreme step to delist which may in certain cases also have a negative impact by preventing the company from re-listing on stock exchanges for at least five years.
Mohit Gogia is partner while Kanika Khanna and Kastubh Madhavan work as associates at Indian law firm S&R Associates. Views are personal.
