A reform highly sought in the listed M&A space has recently been undertaken by SEBI. In its September meeting, SEBI decided to align the takeover and delisting processes and do away with the complicated dual procedure that currently exists.
Under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, when the mandatory open offer obligation is triggered, an acquirer is required to make an offer for at least 26%. In cases where the acquirer already holds/acquires 49% or more of the target company, the additional 26% can take the total shareholding of the acquirer above the minimum public shareholding (MPS) threshold. The MPS law requires listed companies to have at least 25% non-control shareholding.
The SEBI (Delisting of Equity Shares) Regulations, 2009, require that in order to proceed for delisting, a listed entity must comply with all applicable securities laws, including the requirement to maintain MPS of 25%. Here, if the acquirer wants to delist the company, it should comply with the MPS threshold and first reduce its shareholding to 75% (sell shares) and then attempt delisting (buy shares). If the aim was to delist post open offer, the acquirer would have to carry out three public transactions, each directionally opposite to the previous one. The successive and contradictory public transactions confuse shareholders. This is a convoluted process that doesn't help protect investors' rights, but creates a procedural mess that inhibits M&A deals, potentially hurting economic growth.
At the time of enactment of the Takeover Regulations, SEBI did not accept the Takeover Regulations Advisory Committee's recommendation to allow the option of delisting pursuant to open offer. Subsequently, in 2015, it was decided to introduce a framework to provide an option to the acquirer to delist the company at the time of acquisition. As per this framework, an acquirer intending to delist must declare intention at the time of making the detailed public statement, and would then attempt to proceed with delisting in accordance with the procedure laid down in the Delisting Regulations.
If successful, shareholders would exit at the delisting price, and in the event of failure, the open offer obligations would have to be fulfilled. The mechanical combination of the regulations lacked synergy and was cumbersome and didn't allow for a smooth flow of events while maintaining the various rights and obligations of parties involved. The complicated takeover-cum-delisting process also dissuaded acquirers. Thus, it is unsurprising that merely four entities opted for this process in the past 10 years.
Revised framework
Recognising the impracticality of the above process for delisting pursuant to acquisition, and in order to make M&As for listed companies more rational and convenient, while protecting the interests of stakeholders, a sub-group of SEBI's Primary Markets Advisory Committee proposed a new framework for aligning the Takeover Regulations and the Delisting Regulations. SEBI accepted this framework with certain modifications.
As per the new framework, if the acquirer wishes to delist the company upon acquiring control, it must propose a higher price for delisting, which would be inclusive of a premium over the open offer price. If the open offer process results in the acquirer crossing the delisting threshold (90%), the shares would be bought at the delisting price, and if the delisting threshold isn't crossed, the shareholders would be paid the open offer price.
In the event that the acquirer isn't able to cross the delisting threshold, but acquires more than 75% shareholding consequent to the open offer, a period of 12 months from the date of completion of open offer would be granted to attempt delisting under the Delisting Regulations. If delisting is unsuccessful again, the acquirer would be granted 12 more months to reduce its shareholding to 75% to comply with MPS norms.
Acquirers intending the target company to remain listed can decide on the number of shares they wish to purchase during initial purchase as well as the resultant open offer in such a manner that the 75% threshold isn't crossed, or in the case of breach, divest the excess to comply with MPS norms.
As per the previous framework, price discovery is carried out through a reverse book building (RBB) process. In a discussion paper, SEBI noted a few issues plaguing RBB, such as price influence by arbitrage seekers, a group of large shareholders distorting the price leading to small shareholders being denied the chance to exit, complexity of the process that may not be comprehensible to some shareholders, promoters influencing the process by divesting their stake to friendly shareholders, etc.
Thus, while the RBB process justifiably allows shareholders to decide at what price delisting should occur, the issues with the process may not make it ideal for a framework that seeks to align the Delisting Regulations with the Takeover Regulations. Thus, in the new framework, instead of the RBB process, SEBI decided to adopt a differential pricing mechanism, i.e. if the acquirer aims to delist the listed entity, it must propose a higher price for delisting with a 'suitable premium' over the open offer price. However, SEBI has not yet provided the mechanism to determine the said premium over the open offer price. It may likely be left to the acquirer to decide a price that will enable the public part of shareholding to fall below the 10% threshold.
A positive amendment
While SEBI's decision is yet to become regulation, it's a step in the right direction. The simplified process can be carried out in one go instead of two separate processes (delisting and then open offer), and will provide a more rationalised and intuitive path to delist the target company post-acquisition. The proposed pricing methodology would result in the acquirer making a one-time offer (albeit of two figures) to the existing shareholders. The lower financial burden, on account of the delisting price not being inflated during the RBB process, would lead to a freer and more efficient flow of capital.
It would reduce the financial burden on the acquirer as well, which could be high on account of the delisting price being inflated during the RBB process. The high discovered price has led to some failures in delisting. Apart from reducing the financial burden, the revised framework will result in easier compliance and reduce compliance-related costs as well. Most important, it will re-energise the market for control, resulting in improvements in productivity for companies and unlock value for shareholders at the same time.
This article was first published in the Financial Express: Link
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