On June 25, 2021, SEBI issued a discussion paper on ‘Review of Delisting Framework Pursuant to Open Offer’ (Discussion Paper) recommending a new framework which would allow acquirers to simultaneously undertake both delisting and open offers, subject to certain conditions. The proposed framework has been recommended by a sub-group of the Primary Market Advisory Committee (PMAC), in an effort to make the delisting process more seamless and logical for persons acquiring a significant stake in a target company.
Presently, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations) mandates a minimum open offer size of 26% in case of acquisition of shares representing an entitlement of 25% or more voting rights, or control, in a target company. In case the acquirer crosses 75% pursuant to such open offer, the Securities Contract (Regulation) Rules, 1957 require the acquirer to reduce its shareholding below 75% within one year. Further, no delisting can be attempted unless the company complies with the 25% minimum public shareholding (MPS) norm.Subsequently, if the acquirer desires to delist the company, another offer is required to be made for acquisition of minimum 90% shareholding at a price discovered through the reverse book building process. Thus, even if an acquirer seeks to acquire up to 90% stake in a listed entity in the first place, it has to first bring down its shareholding to 75%, and then observe a one-year cooling-off period before attempting to delist the company by acquiring 90% shareholding.
Regulation 5A of the Takeover Regulations
The above process has been criticized as being directionally contradictory, which forces the acquirer to undertake three public transactions of increasing and reducing its shareholding multiple times to comply with different regulations. An attempt to address this issue was made by inserting Regulation 5A under the Takeover Regulations in 2015, which allows acquirers to make a delisting offer prior to making an open offer, if such acquirer make an upfront declaration of its intention to delist at the time of making the detailed public statement (DPS).
However, the above provision did not prove to be lucrative for several reasons, including the fact that the delisting offer would still be subject to the provisions of the SEBI (Delisting of Equity Shares) Regulations, 2021 (Delisting Regulations), which inter alia require the acquirer to obtain prior approval of the board of directors and the shareholders of the target company. Further, if the delisting offer fails, the acquirer would have to comply with the open offer requirements under the Takeover Regulations. This, coupled with the fact that if the delisting offer fails, the open offer price shall be enhanced at a rate of 10% per annum, makes it an unfeasible option for acquirers to undertake delisting through this route.
Recommendations of the Sub-Group
Under new Discussion Paper, it is recommended that the acquirer should upfront declare its intention to delist in the first public announcement and the DPS. In case of indirect acquisitions, the intention to delist may be stated in the DPS.
The Discussion Paper further recommends that if an acquirer declares its intention to remain listed and its total shareholding post open offer crosses 75%, such acquirer can either proportionately scale down its purchases so that the 75% threshold is not crossed, or comply with the MPS norms within the stipulated timeframe. The above optionality balances both the acquirer’s interest of not having to go through the cumbersome process of complying with MPS norms with that of the outgoing shareholders who may not choose to agree to a partial exit.
If the acquirer intends to delist, it would be required to offer two prices - an open offer price as per the Takeover Regulations, and a delisting price with a suitable premium over the open offer price. The proposed delisting price should be declared upfront along with the open offer price, along with an explanation with the rationale and basis for such delisting price. For indirect acquisitions, the delisting price is to be notified at the time of making the DPS.
Further, in order to delist, the acquirer would be required to seek approval of the stock exchanges, along with an approval of two-thirds majority of the minority shareholders. While the above approvals can be obtained any time after the public announcement and before commencement of the tendering period, in the event such approvals are not received, the delisting process would be rendered void and the open offer would continue with the takeover price.
In case the delisting offer fails and the acquirer crosses 75% shareholding due to the open offer, further attempts at delisting can be made within a period of 18 months, subject to a six-months’ gap between two delisting attempts, and a six -months’ gap between the date of completion of open offer and the next delisting attempt.
The Discussion Paper proposes a comparatively easier process for taking a company private post takeover, by allowing acquirers to simultaneously undertake both delisting and takeover through one offer. The recommendations not only offer a simpler pricing mechanism for delisting instead of the reverse book building process, but also preserve the minority shareholders’ interests by retaining their right to accept or reject the delisting price.
It should be noted that previously also, Regulation 5A of the Takeover Regulations had been introduced in line with the same objective as that of the Discussion Paper; however, only two out of four delisting offers have been successfully carried out under the said provision in the past ten years. In this regard, the Discussion Paper appears to take care of the earlier missed opportunity to boost M&A transactions, by balancing competing interests amongst stakeholders and facilitating ease of doing business.