Delisting of shares from Indian stock exchanges has become a major issue for the

financial regulator and the finance ministry to tackle.

Almost every shareholder/investor has faced a scenario of having shares of a

company that is seeking delisting from the stock exchange.

This is either when a substantial acquisition of shares by acquirer (where the public
holding dips below requisite levels) takes place and an exit offer made, or through
mergers/ acquisitions or compulsory delisting enforced by the stock exchange.

Investors also face the bane of being stuck with shares of a company that has not
witnessed trading for years. Over the past two years, at least 26 companies, mainly
multinational companies have delisted themselves from the stock exchanges, while
another 90 other firms propose to do the same in coming years.

Why are several companies delisting themselves from the bourses? Should they be
allowed to do so, while keeping shareholder and investor interest paramount? A
Securities and Exchange Board of India-appointed committee has prepared a final
draft report on the delisting of shares.

What does the committee actually recommend? How have investor rights now been
protected? Which are the key issues facing shareholders of these companies? Let us
take a closer look.

How critical is the issue of delisting of shares from stock exchanges by Indian
companies?

As observed by the Sebi-appointed committee, delisting of shares has created

uneasiness amongst investors. The ministry of finance has discussed this issue with
Sebi and the possible negative impact on the securities market.

There are more companies today which seek delisting from stock exchanges due to
various factors.

In which ways in can a company delist its shares from a stock exchange?

There are several methods to delist from the Indian stock exchanges. Companies
may upon request get voluntarily delisted from any stock exchange other than the
regional stock exchange for the company, following the delisting guidelines.

In such cases, the companies are required to obtain prior approval of the holders of
the securities sought to be delisted, by a special resolution at a General Meeting of
the company.
The shareholders will be provided with an exit opportunity by the promoters or
those who are in the control of the management.

Companies can get delisted from all stock exchanges following the substantial
acquisition of shares. The regulation state that if the public shareholding slides to
10 per cent or less of the voting capital of the company, the acquirer making the
offer, has the option to buy the outstanding shares from the remaining shareholders
at the same offer price.

A stock exchange may compulsorily delist the shares of a listed company under
certain circumstances. In such a case there is no provision for an exit route for the
shareholders except that the stock exchanges would allow trading in the securities
under the permitted category for a period of one year after delisting.

In scenarios like mergers and amalgamations and under legal directions for sick
companies under Bureau for Industrial and Financial Reconstruction, companies can
be delisted.

So is delisting of shares always detrimental to shareholders? Can guidelines be

created to restrict delisting of shares?

The argument presented is that large, profit making and financially sound MNCs
have delisted its shares from SEs in recent years and this has caused some concern.

There is a perception within the financial markets that investors have not being
adequately compensated for the permanent withdrawal of a good investment
opportunity.

But it must be noted that companies have resorted to delisting due to depressed
market conditions and subsequent acquisition of the remaining securities from the
shareholders.

The current FII reforms also allow foreign companies to hold 100 per cent equity in
key sectors and streamline operations for all holdings.

In the currently liberalised scenario it would be improper to create fresh entry and
exit conditions for companies.

Listing and delisting are commercial decisions and should be based on business
considerations. As long as the principles of adequate corporate governance,
necessary approvals of shareholders and interests of the minority shareholders
supported and followed, there should be no case against delisting.
An interesting fact is that a study of companies which have been delisted from the
BSE shows that in 14 out of 29 companies (which have been or are in the process of
being delisted from the BSE), the 52-week average was greater than the 26 weeks
average.

The Sebi committee had compared the averages of closing highs and lows of 52
weeks with those of averages of weekly closing highs and lows for 26 weeks from
the date of offer.

So what has the Sebi committee now recommended?

The committee has broadly stated that while there would be no restrictions on
delisting per se, the monitoring of events leading to delisting (to safeguard investor
interests) should be stringent and improved upon.

The committee has discussed issues like an exit price for delisting, adopting a
reverse book-building process to determine this and taking steps to ensure that
there is no scrip price manipulation while the process is on.

The following recommendations have been made:

The exit price for delisting should be in accordance with the book-building process;
The offer price should have a floor price (a minimum base price) which will be the
average of 26 weeks traded price and without a maximum price;
Market forces will determine the price above the base price. Stock exchanges will
provide the infrastructure to ensure transparency whereby investors can see the
prices on screens;
To reduce risk of price manipulation, the scrip will be under watch by the
exchanges;
Comprehensive provisions should include procedures governing the entire subject
of delisting of securities of companies, and should cover cases in which companies
on their own seek delisting of their securities from all or some of the stock
exchanges, as well as those where the stock exchanges can compulsorily delist the
securities of a company.
There are some new terms which investors/shareholders will have to keep in mind.
Let us take a closer look at some:

What is the 'reverse book-building' process? And what will the exit price be? How
does the process work?

You would have heard about the book-building process (The process of securing the
optimum price for a company's share. The issuing company decides the price of the
security by asking investors how many shares and at what price they would be
interested in) which is adopted when a initial public offering or divestment is made.
Well, it is the same process. It is called the 'reverse' book-building process because
the aim is to sell the shares (exit from the company) while in the case of the normal
book-building the process is to buy the shares (and invest into the company).

The process which would be adopted would be similar to that adopted in the initial
public offering process where is a book is kept open for a specific number of days.

The details like floor price, methodology to be adopted for an acceptable price,
period of open offer) will be disclosed when the book-building process commences
through the appointment of a merchant banker.
The floor price for the acquisition shall be specified but no ceiling price.
What will be the exit price recommended now?

The committee has recommended that an exit price concept should be adopted in
line with that used for a normal book-building offer.

The delisting process, hitherto was possibly inadequate for investors in terms of the
exit price mechanism used by the delisted companies. This exit price was based on
the average of the preceding 26-week high and low prices.

This mechanism has not worked well in depressed Indian market conditions and the
price arrived through this principle may not adequately compensate the shareholder
for the permanent loss of investment opportunity, especially in a company whose
shares are regarded as value investment.

It is now felt that the book-building process would provide the transparent and fair
mechanism to price shares and would ensure investors' participation in the whole
delisting process. It is assumed that rational investors would quote the reasonable
premium in the book-building.

The committee has suggested changes to the calculation of the minimum offer
price?

The Sebi committee examined alternative methods of arriving at a minimum offer

price. Under the existing takeover code, an acquirer is required to make an offer to
buy securities at the same offer price.

The principle to be followed is - whether the acquirer makes an offer to buy 100 per
cent of the securities or reaches through several stages of acquisition a level of 90
per cent or more, he has to make an offer to buy the remaining securities at the
same offered price.

In cases where there has been no acquisition of shares by an acquirer (who would
be a majority shareholder or having management control), the average of 26 weeks
closing highs and lows was being taken as the minimum price and the offer for
delisting was being made at a premium to this minimum price.

The Confederation of Indian Industry representative argued against the norm

practiced and has suggested that the regulator adopted the average of weekly
highs and lows of either 26 weeks or 52 weeks as the minimum offer price.