Why SEBI is reviewing delisting norms, and may choose the ‘fixed price’ method
- The Securities and Exchange Board of India (SEBI) is reviewing delisting regulations for listed companies.
- This is being done to rein in the manipulation of shares of a company that has opted for delisting from the stock exchanges.
- It may allow companies to delist shares at a fixed price, as against the current ‘reverse book-building’ process.
Delisting of Securities
- Delisting means removing the securities of a listed company from a stock exchange.
- Once delisted, the securities of that company can no longer be traded on the stock exchange.
- Delisting can be either voluntary or compulsory.
- In voluntary delisting, a company decides on its own to remove its securities from a stock exchange
- In compulsory delisting, they are removed as a penal measure for the company not making submissions or complying with requirements set out in the listing agreement within the prescribed timeframes.
- If a company wants to delist its securities, it needs to buy back 90% of the total issued shares.
The reverse book-building process
- It is a process used for price discovery.
- During the period for which the reverse book-building is open, offers are collected from shareholders at various prices.
- The buyback price is determined after the offer closing price.
- The Issue
- Certain constituents in the market, in anticipation of the delisting, acquire shares and jack up the price of shares to unsustainable levels.
Fixed Price Method
- SEBI may allow companies to delist shares at a fixed price instead of using the reverse book-building mechanism.
- While it can help in resolving some of the present issues, the benefits can be assessed only after SEBI announces the methodology to arrive at the fixed price.
- Currently, apart from the price discovery, promoters have to meet other thresholds such as receipt of minority shareholder consent, and reach 90% shareholding in order to successfully delist.
- The process will become easier only if all aspects, not just the price, are reviewed holistically.
Conclusion
- If the price discovery is replaced by a fixed price offer with a prescription on the floor price, the method should be robust enough to avoid undue challenges on the valuation/determination of the floor price.