SEBI's Fresh Approach to Simplifying Delisting

SEBI has introduced significant changes to its Delisting Regulations, with the most prominent being the addition of a fixed price mechanism alongside the existing reverse book building (RBB) process. The fixed price method addresses challenges like speculative trading and inflated exit prices seen with RBB, providing a clearer and more predictable delisting process. The method reduces the risk of delisting failures caused by unexpected price surges and offers promoters a simpler alternative.

Historically, SEBI had implemented the fixed price method for voluntary delisting, allowing promoters to offer a pre-determined price to buy back shares. However, concerns about transparency and undervaluation, especially among minority shareholders, led SEBI to introduce the RBB method in 2003. The RBB process empowered shareholders to determine the exit price by bidding, ensuring a more transparent and shareholder-influenced price discovery. While initially successful, the RBB method has faced increasing issues over time, particularly with speculative trading driving volatility, complicating shareholder decisions.

From 2018 to 2023, 114 voluntary delisting attempts were made in India, with 28 failing due to factors like insufficient shares tendered or acquirers rejecting the discovered price. SEBI’s latest changes now allow promoters to choose between the fixed price method, which includes a mandatory 15% premium over the floor price, and the RBB method. The floor price, determined under SEBI’s (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, will now be calculated from the date of the initial public announcement, rather than the board approval date. SEBI has also introduced the concept of "adjusted book value" as a method for calculating the floor price for both liquid and illiquid stocks, with special provisions for public sector entities.

In another major move, SEBI has created a new framework for the delisting of investment holding companies, which often suffer from poor market valuations due to holding company discounts (the difference between the market capitalization of a holding company and the net value of its investments). These companies can now delist via a “scheme of arrangement,” a legal restructuring process that allows for selective capital reduction. This involves buying back shares from specific shareholders and canceling them, effectively reducing the company’s share capital. To qualify, the holding company must have at least 75% of its fair value in liquid or listed entities, ensuring that its assets are easily convertible to cash, benefiting shareholders.

SEBI’s revised framework aims to resolve long-standing challenges in the delisting process, improve price transparency, and address the undervaluation issues that holding companies face. By reintroducing the fixed price mechanism, SEBI hopes to attract more conservative acquirers and streamline the process for companies and shareholders alike.

This overhaul not only simplifies delisting but also provides flexibility, greater price certainty, and a clearer pathway for investment holding companies to deliver value directly to their shareholders.