SEBI (Delisting of Equity Shares) Regulations, 2021-Imposes new responsibilities on the board of directors.

Securities and Exchange Board of India (“SEBI”) vide notification dated 10th day of June 2021 notified SEBI (Delisting of Equity Shares) Regulations, 2021 doing away with the earlier SEBI (Delisting of Equity Shares) Regulations, 2009. The aim of the new regulations is to further streamline & strengthen the delisting process, and to lump loopholes  in  the  delisting  process considering  the interests  of  the  promoters,  acquirers  and  public shareholders .

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SEBI (Delisting of Equity Shares) Regulations, 2021-Imposes new responsibilities on the board of directors.

Securities and Exchange Board of India (“SEBI”) vide notification dated 10th day of June 2021 notified SEBI (Delisting of Equity Shares) Regulations, 2021 doing away with the earlier SEBI (Delisting of Equity Shares) Regulations, 2009. The aim of the new regulations is to further streamline & strengthen the delisting process, and to lump loopholes  in  the  delisting  process considering  the interests  of  the  promoters,  acquirers  and  public shareholders .

Introduction:

Listing means admission of a Company’s securities to the trading platform of a Stock Exchange, to provide marketability, liquidity to the security holders and to adhere to the various regulatory compliances applicable to it. On the other hand, Delisting means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be tradable at that stock exchange.

While there could be many reasons for delisting, the falling stock prices, bearish markets, lack of trading, depressed market conditions caused by the current covid-19 pandemic, and the continued cost and effort of regulatory compliance have catalyzed voluntary delisting as an option for some acquirers.

Voluntary delisting:

Voluntary delisting means the delisting of equity shares of a company voluntarily on an application made by it under Chapter III of these regulations. After delisting, the equity shares remain listed on any recognised stock exchange that has nationwide trading terminals i.e. Bombay Stock Exchange Limited (BSE) and National Stock Exchange Limited (NSE).

Compulsory delisting:

Compulsory delisting means delisting of equity shares of a company by a recognised stock exchange under Chapter V of these regulations.

Where a company has been compulsorily delisted, the company, its whole-time directors, person(s) responsible for ensuring compliance with the securities laws, its promoters and the companies which are promoted by any of them shall not directly or indirectly access the securities market or seek listing of any equity shares or act as an intermediary in the securities market for a period of 10 years from the date of such delisting.

Applicability:

Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021 (“these regulations”) shall apply to delisting of equity shares of a company including equity shares having superior voting rights.

Non-applicability:

These regulations shall not apply to the delisting of equity shares of a listed company made pursuant to a resolution plan approved under section 31 of the Insolvency Code, if such plan provides for:

(i) delisting of such shares; or
(ii) an exit opportunity to the existing public shareholders at a specified price:

Conditions for delisting:

Delisting shall not be permitted in the following cases:

  • Unless a period of 3 years has elapsed since the listing of the shares;
  • In case of Outstanding Convertible securities;   
  • Pursuant to a buyback of equity shares by the company, unless a period of six months has elapsed from the date of completion of such buyback;
  • Pursuant to a preferential allotment made by the company, unless a period of six months has elapsed from the date of such allotment.
Procedure for delisting where no Exit Opportunity is provided to Public Shareholders

After delisting, the equity shares remain listed on any recognised stock exchange that has nationwide trading terminals.

The following procedure shall be followed in this regard:

(a) obtain the prior approval of its Board of Directors;
(b) Make an application to the relevant recognised stock exchange(s) for delisting;
(c) Issue a public notice in newspaper of the proposed delisting;
(d) Disclose the fact of delisting in the 1st Annual Report of the Company prepared subsequent to delisting

Application for delisting shall be disposed of by the recognised stock exchange(s) within a period not exceeding 30 working days from the date of receipt of such application.

Procedure for delisting where Exit Opportunity is provided to Public Shareholders (Regulation 8 to 26)

The Equity shares may be delisted from all the recognised stock exchanges having nationwide trading terminals on which they are listed.

The following procedure shall be followed in this regard:
1. Initial public announcement (Regulation 8):
  • Make an initial public announcement to all the stock exchanges on the date when the acquirer(s) decides to voluntarily delist the equity shares of the company.
  • A Copy of Initial Public announcement shall be sent to the Company not later than 1 working day from the date of the initial public announcement.
2. Appointment of the Manager to the offer (Regulation 9):
  • Prior to making an initial public announcement, the acquirer shall appoint a merchant banker registered with SEBI (“the Board”) as the Manager to the offer.
  • The initial public announcement and the subsequent activities as required under these regulations shall be undertaken by the acquirer through the Manager to the offer.
3. Approval by the Board of Directors (Regulation 10):
  • Obtain approval of the Board of Directors to delist the equity shares of the company, not later than 21 days from the date of the initial public announcement.
  • The Board of Directors of the company, before considering the proposal of delisting, shall appoint a Peer Review Company Secretary and provide the necessary information for carrying out due-diligence.
  • The Company Secretary shall carry out the due-diligence and submit a report to the Board of Directors of the company.
  • The Board of Directors while communicating its decision on the proposal of delisting, shall also submit the due -diligence report of the Company Secretary.
4. Approval by shareholders (Regulation 11):
  • Obtain the approval of the shareholders through a special resolution, not later than 45 days from the date of obtaining the approval of Board of Directors.
  • The special resolution shall be passed through postal ballot and / or e-voting.
  • Number of votes cast by public shareholders in favour of the proposal to be at least 2 times the votes cast against it.
5. In-principle approval of the stock exchange (Regulation 12):
  • The Company shall make an application to the relevant recognised stock exchange for in-principle approval, not later than 15 working days from the date of passing of the special resolution or receipt of any other statutory or regulatory approval, whichever is later.
  • Application for in-principle approval to be supported by an audit report as required under regulation 76 of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018.
  • Application for In-principle approval to be disposed of by the recognised stock exchange within 15 working days from the date of receipt of such application.
CHAPTER IV (Exit Opportunity)
1. Escrow account (Regulation 14):
  • The acquirer shall open an interest bearing escrow account, not later than 7 working days from the date of obtaining the shareholders’ approval, and deposit therein an amount equivalent to 25% of the total consideration.
  • The acquirer shall enter into a tripartite agreement with the Manager to the offer and the Bank.
  • Before making the detailed public announcement, the acquirer shall deposit in the escrow account, the remaining consideration i.e. 75% of total consideration.
  • Escrow account shall consist of either:
  1. cash deposited with a Scheduled Commercial Bank; or
  2. a bank guarantee in favour of the Manager to the offer; or
  3. a combination of both.
  • In case of failure of the delisting offer, 99% of the amount lying in the escrow account shall be released to the acquirer within 1 working day from the date of public announcement of such failure.
2. Detailed public announcement (Regulation 15):
  • The acquirer shall, within 1 working day from the date of receipt of in-principle approval for delisting of equity shares from the recognised stock exchange, make a Detailed Public Statement (DPS).
  • DPS shall specify a date to be called ‘specified date’ which shall not be later than 1 working day from the date of the detailed public announcement for determining the name of shareholders to whom letter of offer shall be sent.
3. Letter of offer (Regulation 16):
  • Letter of offer to be dispatched to the public shareholders not later than 2 working days from the date of the detailed public announcement.
  • The letter of offer shall be sent to all public shareholders, whose names appear on the register of the company or depository as on the date specified in the detailed public announcement.
  • A copy of the letter of offer shall also be made available on the websites of the company and the Manager to the offer for the benefit of the public shareholders.
4. Bidding mechanism (Regulation 17):
  • Opening of bidding process not later than 7 working days from the date of the detailed public announcement and shall remain open for 5 working days.
  • Make a public announcement within 2 working days from the closure of the bidding period, disclosing the success or failure of the reverse book building process, along with the discovered price accepted by the acquirer in the event of success of the said process.
5. Discovered price (Regulation 20):
  • The discovered price shall be determined through the reverse book building process.
  • The floor price shall be determined as follows:
  1. Floor price where equity shares are frequently traded shall be higher of the following:
  • the highest negotiated price per share;
  • the volume-weighted average price of the equity shares of the Company during the fifty-two weeks;
  • the volume-weighted average price of the equity shares of the Company during the twenty-six weeks;
  • the volume-weighted average market price of such shares for a period of sixty trading days.

2. Floor price where the shares are infrequently traded to be determined by the  acquirers and Merchant Banker taking into account the following:

  • valuation parameters including, book value,
  • comparable trading multiples, and
  • such other parameters as are customary for valuation of shares of such companies.
6. Option to accept or reject the discovered price or counter offer (Regulation 22):
  • The acquirer shall be bound to accept the equity shares tendered or offered in the delisting offer, if the discovered price determined through the reverse book building process is equal to the floor price or the indicative price, if any, offered by the acquirer.
  • The acquirer shall be bound to accept the equity shares, at the indicative price, if any offered by the acquirer, even if the price determined through the reverse book building process is higher than the floor price but less than the indicative price.
7. Failure of the offer (Regulation 23):

(1) The delisting offer shall be considered to have failed under the following circumstances:-

  • the minimum number of shares are not tendered / offered;
  • the price discovered through the reverse book building process is rejected by the acquirer.

(2) In case of failure of the delisting offer:

(a) the expenses relating to the offer for delisting shall be borne by the acquirer.

(b) the acquirer, whose delisting offer has failed, shall not make another delisting offer until the expiry of six months-

  • from the date of disclosure of the outcome of the reverse book building process
  • from the date of making public announcement for the failure of the delisting offer
  • from the date of making public announcement for the failure of counter offer
8. Payment upon success of the offer (Regulation 24):
  • All the public shareholders, whose bids are accepted, shall be paid the discovered price or a higher price, if any, offered by the acquirer.
  • The acquirer shall be liable to pay interest at the rate of 10% p.a., if the price payable is not paid to all the shareholders whose bids have been accepted within the specified time.
9. Final application to the stock exchange after successful delisting (Regulation 25):
  • Within 5 working days from the date of making the payment to the public shareholders, the acquirer shall make the final application for delisting to the relevant recognised stock exchange(s).
  • The final application shall be disposed of by the recognised stock exchange(s) within 15 working days from the date of receipt of such application.
  • Upon disposal of the final, the equity shares of the company shall be permanently delisted from the stock exchange(s).
10. Right of the remaining public shareholders to tender equity shares (Regulation 26):
  • Remaining public shareholder holding such equity shares may tender their shares to theacquirer upto a period of at least 1 year from the date of delisting.
  • The acquirer shall accept the remaining shares and pay the same price at which the equity shares had been delisted.
COMPULSORY DELISTING:
1. Compulsory delisting by a stock exchange (Regulation 32):
  • A recognised stock exchange may, by a reasoned order, delist equity shares of a company on any ground prescribed in the rules made under section 21A of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)
  • Before passing an order, the recognised stock exchange shall give a public notice giving not less than 15 working days for any representations from aggrieved person.
  • The recognised stock exchange on passing order make public notice disclosing:

(a) the fact of such delisting,

(b) name and address of the company

(c) fair value of the delisted equity shares

(d) names and addresses of the promoters of the company

  • Inform all other stock exchanges where the equity shares of the company are listed
  • The recognised stock exchange shall upload a copy of the said order on its website.
SPECIAL PROVISIONS FOR SMALL COMPANIES
1. Delisting of equity shares of small companies (Regulation 35):

Equity shares of a small company may be delisted from all the recognised stock exchanges where they are listed, without following the procedure provided for exit opportunity (Chapter IV-Voluntary Delisting with Exit Opportunity) where:

  • the Company has a paid up capital not exceeding 10 crore rupees and net worth not exceeding 25 crore rupees as on the last date of preceding financial year;
  • the number of equity shares during the 12 calendar months immediately preceding the date of board meeting held for consideration of the proposal of delisting is less than 10% of the total number of shares of the company;
  • the company has not been suspended by any of the recognised stock exchanges having nationwide trading terminals for any non-compliance in the preceding 1 year.

Conditions to be fulfilled by such small companies in addition to requirements of Regulation 10 and 11

  • Acquirer(s) appoints a Manager to the offer and decides an exit price after consultation;
  • Exit price shall not be less than the floor price determined in terms of regulations 8(2)(e) of SEBI (SAST) Regulations, 2011.
  • The acquirer shall inform all shareholders individually of delisting of equity shares and seeking their consent for the proposal for delisting.
  • At least 90% of such public shareholders give their consent in writing to the proposal for delisting, and have consent either to sell their equity shares at the price offered by the acquirer or to continue to hold the equity shares even if they are delisted;
  • The acquirer completes the entire process of delisting within 75 working days of the first communication made.
  • The acquirer shall make payment of consideration in cash within 15 working days from the date of expiry of 75 working days .
  • The promoter shall be liable to pay interest at the rate of 10% p.a to all the eligible shareholders, if the price payable is not paid within the time specified.
2. Delisting of equity shares of small companies (Regulation 35):
  • In case of Voluntary Delisting: No application for listing for a period of 3 years from the delisting
  • In case of Compulsory Delisting: No application for listing for a period of 10 years from the delisting
  • Application may be made for listing of delisted equity shares in respect of a company:

(a) whose equity shares have been delisted pursuant to a resolution plan under section 31 of the Insolvency Code;

(b) whose equity shares are listed and traded on the innovators growth platform pursuant;

(c) whose equity shares have been delisted in terms of regulation 35 of these regulations.

  • An application for listing made in respect of delisted equity shares shall be deemed to be an application for fresh listing of such equity shares and shall be subject to provisions of law relating to listing of equity shares of unlisted companies.
Conclusion:

Although steps have been taken by the market regulator (SEBI) to reduce the maximum time involved in grant of in-principle approval, detailed public announcement, and dispatch of offer letters, it has imposed some additional responsibilities on the board of directors. The board of directors, before considering the proposal of delisting, shall appoint a Peer Review Company Secretary for carrying out due-diligence and furnish the details of trading and off-market transactions of the acquirer or its related entities and top 25 shareholders, during the period of two years, and, provide such additional information, as and when sought by the Company Secretary.

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