Other Merchant Banking Activities — Delisting of Equity Shares & Exit Opportunities (Chapter VIII - Part 3)

Introduction to Delisting of Equity Shares

Delisting of equity shares refers to the permanent removal of a company's shares from the trading platform of a recognized stock exchange. Once delisted, the shares of the company can no longer be bought or sold on the stock market. In India, this process is governed by the SEBI (Delisting of Equity Shares) Regulations, 2009, which apply to the delisting of equity shares from all or any of the recognized stock exchanges where such shares are listed.

However, these regulations do not apply to securities that are listed without making a public issue on the institutional trading platform of a recognized stock exchange.

Voluntary vs. Involuntary Delisting

Under the SEBI framework, a listed company can be delisted through two distinct routes:

1. Voluntary Delisting

Voluntary delisting is a commercial condition where the issuer company no longer wants to be on the trading platform of the exchange and voluntarily chooses to exit the stock exchange. This is typically driven by restructuring, strategic buyouts, or when the cost of maintaining listing status outweighs the benefits of public trading.

2. Involuntary (Compulsory) Delisting

Involuntary delisting involves the compulsory removal of a company's shares from the stock exchange by the exchanges themselves. This is initiated as a disciplinary action by either the stock exchanges or SEBI due to the company's non-fulfillment of listing criteria, continuous compliance defaults, or regulatory violations.

Statutory Prohibitions and Restrictions on Delisting

To protect public investors and maintain market integrity, SEBI imposes strict embargoes on delisting applications. No company is allowed to apply for delisting, and no stock exchange is permitted to approve a delisting application, under the following circumstances:

• Pursuant to a Buyback: A company cannot pursue delisting as a consequence of, or pursuant to, a buyback of its equity shares.
• Pursuant to Preferential Allotment: Delisting cannot be carried out pursuant to a preferential allotment of shares.
• Minimum Listing Period: No company can apply for delisting unless a minimum period of three years has elapsed since the date of its initial listing on the stock exchange.
• Outstanding Convertible Instruments: A company is barred from delisting if any instruments that are convertible into the shares sought to be delisted remain outstanding.

Role and Obligations of the Merchant Banker in Voluntary Delisting

In a voluntary delisting transaction, the acquirer or promoter must appoint a SEBI-registered merchant banker before making the formal Public Announcement. The promoter and the appointed merchant banker share joint responsibility for ensuring absolute compliance with SEBI's delisting provisions.

1. Escrow Account Framework

Before making the Public Announcement, the promoter or acquirer must open an escrow account and deposit the total estimated consideration. This deposit serves as a performance guarantee and is calculated using the following simple line formula:

Total Estimated Escrow Deposit = Floor Price * Total Number of Outstanding Equity Shares Held by Public Shareholders

2. Dispatch of the Letter of Offer

The acquirer or promoter, in coordination with the merchant banker, must dispatch a formal Letter of Offer to all public shareholders.

• Timeline restriction: The Letter of Offer must be dispatched not later than two working days from the date of the Public Announcement.
• Content: The letter must contain all material disclosures made in the public announcement alongside other critical regulatory disclosures to help shareholders make informed decisions.

3. Prevention of Insider / Promoter Bidding

To maintain absolute fairness in price discovery:

• The promoter, or any Person Acting in Concert (PAC) with the promoters, is strictly prohibited from making a bid in the delisting offer.
• The merchant banker is legally mandated to implement necessary controls and take active steps to ensure compliance with this bidding restriction.

Pricing and Valuation in Compulsory Delisting

When a company is compulsorily (involuntarily) delisted by a recognized stock exchange, the exchange must appoint one or more independent valuers.

• Objective: The independent valuer is tasked with determining the fair value of the delisted equity shares.
• Investor Exit: This fair value acts as the benchmark price at which promoters must acquire shares from the public, providing an exit route to minority investors in a failing or non-compliant company.

Severe Consequences of Compulsory Delisting

To deter chronic non-compliance, SEBI imposes a severe market ban on entities associated with compulsorily delisted companies.

Where equity shares are compulsorily delisted by a recognized stock exchange, the following entities are barred from accessing the securities market or seeking listing for any equity shares for a strict period of ten years from the date of delisting:

1. The delisted company itself.
2. Its whole-time directors.
3. Its promoters.
4. Any other companies promoted by any of the promoters or whole-time directors.

Exit Opportunity for Dissenting Shareholders

Under certain corporate restructurings, promoters are legally required to provide an exit route to shareholders who vote against specific management decisions.

Trigger Conditions under the Companies Act, 2013

An exit offer must be made by the promoters or shareholders in control of an issuer to dissenting shareholders under the following situations:

• A change in the business objects of the company as stated in its original prospectus.
• A variation in the terms of a contract referred to in the prospectus.

Key Exclusion

These exit offer provisions do not apply to listed companies where there are neither identifiable promoters nor shareholders in control of the issuer.

Comparative Matrix: Voluntary vs. Compulsory Delisting

Table 8.4: Comparison of Voluntary and Compulsory Delisting Routes

Important Terms to Remember

• Voluntary Delisting: A scenario where an issuer company decides to pull its shares from the stock exchange trading platform of its own accord.
• Involuntary Delisting: The forced removal of a company's shares by an exchange or SEBI as a penalty for rule violations.
• Dissenting Shareholders: Minority shareholders who vote against proposed modifications to the company's business objects or contract terms.
• Floor Price: The base price used to calculate the required escrow deposit before a voluntary delisting offer is announced.
• Independent Valuer: A professional appointed by the stock exchange to establish the fair value of shares in a compulsory delisting.

Key Takeaways

1. Strict Prohibition Timelines: A company is barred from seeking delisting if it has been listed for less than three years, has outstanding convertible instruments, or is executing the action alongside a buyback or preferential allotment.
2. Promoter Bidding Exclusion: During a voluntary delisting process, promoters and Persons Acting in Concert (PACs) are strictly forbidden from bidding in the offer to protect the integrity of price discovery.
3. Escrow Funding Lock-In: Promoters must fully fund an escrow account with the total estimated acquisition cost (Floor Price multiplied by Public Outstanding Shares) before they can release a Public Announcement for voluntary delisting.
4. Severe Decadal Penalty: Compulsory delisting carries a massive ten-year ban from the capital markets, penalizing not just the non-compliant company but also its whole-time directors, promoters, and any sister concerns promoted by them.