December 6, 2021

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Analysing the special provisions for delisting a listed subsidiary company of a listed holding company in India

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This article is written by Thayumana Sundaram S., pursuing Diploma in US Corporate Law and Paralegal Studies from LawSikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho) and Smriti Katiyar (Associate, LawSikho).

Table of Contents

The process of removing company securities (listed shares) from the publicly traded stock exchange is called a delisting procedure. It is a  widely accepted practice based on the company’s financial and management goals from their current position in the market.

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Earlier this was considered as a lengthy and cumbersome procedure, which was established by the SEBI (Delisting of Equity Shares) Regulations, 2009. 

Even if a company used to feel that the listed shares of their subsidiary business are not good for them and for the public, they would rarely go for the delisting process due to the compliance’s complexities under the old regulation.

However, in the recent notification of  The Securities and Exchange Board of India (SEBI) on 11 June 2021,  has expressed its intention to address the core issue and try to create more business-friendly compliances for the parent company to delist their subsidiary in the same line of business. Let us first look into the details of delisting and its practicality.

As stated above, the company leaves the public share trading markets for various reasons ranging from mergers, bankruptcy, failure in listing requirements, or change to private management.

Which comes under one of the two methods mentioned below:

Involuntary delisting or forced

The regulatory authority conducts this delisting for various reasons including violation of any listing regulations and failing to meet minimum financial standards; this is considered as an indicator of the company’s poor economic performance, financial health or governance. 

The exchange issues the warning usually with a 30 days’ notice and after that, the company is forced to delist itself from an exchange due to its failure to meet the listing requirements handout by exchanges.

Voluntary delisting

It is based on the corporate decisions made by the companies to delist themselves in full compliance with the exchanges, which will be executed by re-purchasing all its shares at a higher market price.

This requires a special resolution, shareholders approvals, and other mandatory compliances to be more compatible with the recent SEBI scheme of 2021, which we are as follows.

Companies  generally opt  for voluntary delisting because of  the following reasons:

  • Undervaluation of their share by the public market over a period of time (Lower PE of stock) when compared to a similar industry.
  • A financial decision in saving of excess revenue to buy back shares, which they feet are a better investment rather than investing in other projects.
  • Capital distribution of the value of the shares by making the market happy, like allocating regular dividends etc. So, purchasing back the shares increases the share prices.
  • Trying to use the low-value share price in the market, thereby increasing their ownership of shares from the public.
  • Interest to move the administration to a more private front and with Less regulatory compliance and thereby reducing the related costs, such as listing fee, compliance maintained etc.

Alternatives to voluntary delisting

Due to the lengthy process of voluntary delisting, which takes more than a year, generally, the company opts for other viable solutions to make the delisting a little simpler. They may consider the following alternatives which may result in some material aspects of delisting such as;

  • They tend to increase the promoter’s shares in the target company (but there is a restriction of 75% maximum for listed trading companies). With the Buyback policy of shares by companies themselves from the public-traded stock market, only the permitted parts of shares can be bought back, which also attracts regulatory compliance.

Analysis

  • The Securities and Exchange Board of India (SEBI) has announced a new standard operating procedure (S.O.P) for delisting the Subsidiary company, where the listed subsidiary and its parent holding company should be in the same line of business.
  • SEBI (Delisting of Equity Shares) Regulations, 2021 Known as “Delisting Regulations 2021”. Which came into force by replacing the old regulation of 2008. As Regulation 37 states, the equity shares of a listed subsidiary company of a holding patent company may be delisted from the stock exchanges under a scheme of arrangement under Sections 230 to 232 of the Companies Act, 2013.
  • The term ‘same line of business, is defined as at that least 50 percent of revenue from the operations of a subsidiary and holding company, must come from the same area of operation as per the last audited annual financial results, which should be submitted by both the companies in compliance with SEBI (LODR) Regulations, 2015. 
  • Chapter VI, Part C, of Regulation 37 establishes a special provision for a subsidiary to get delisted through the “scheme of arrangement” (which has been newly inserted). 
  • This scheme of arrangement can be carried out between the holding and listed subsidiary companies having a minimum of 50 per cent of the net tangible assets of the investment in the same line of business as per the last audited annual financial results submitted by two companies.
  • Moreover, both the listed subsidiary, the holding company and the listed subsidiary have to provide a self-certification concerning both the companies being in the same line of business,” said the SEBI circular.

The process of delisting will differ when company security is listed on many exchanges, but the overall process of delisting of the company will be similar to a maximum extent that is required;

Events and timeline

  • A resolution needs to be passed by the board of the company in approving the delisting process, and it should comply with security laws and the same has to be the date of the acquirer expressing the consent, a Special resolution needs to be passed. Within 45 days from the date of approval by the board.
  • The company should intimate their delisting proposal to the concerned exchange before passing the board resolution and appoint a merchant banker to carry out  Due-Diligence and submit the report to the exchange.
  • After getting the shareholders’ approval, an Escrow Account needs to be created within 7 (seven) working days. After that, shareholders’ approval or regulatory approval needs to be attained. then, In-principle approval Within 15 (fifteen) working days.
  • In earlier rules, there was to be a separate merchant banker for both board and offer, but now the seller’s merchant banker will also act as manager for the offer.
  • Merchant Banker will perform a reverse book building process.
  • The outcome of the Reverse Book Building (‘RBB’) has to be published within a few hours from the closure of the bidding period. The same is also required to be published in the same newspapers and a detailed public announcement is to be made within 2 working days.
  • Now, offer prices will be obtained from all shareholders.
  • In case of failure, 90% of the shares are not tendered on the date of disclosure of the outcome of the RBB process.
  • Discovered price being rejected by acquirer: on the date of making a public announcement because of the failure of the delisting. If the discovered price is the same as the floor price,  then payment is made through the secondary market mechanism.
  • If the discovered price is higher than the floor price: then payment should be made within 5 working days to the public shareholders.
  • After the successful delisting and settlement of the payment to the public shareholders, a final application should be made to the stock exchange Within 5 working days as confirmation.
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In the recent time, the Vedanta general delisting was worth noting; there are substantial reasons for the delisting and they are identified as follows:

  • They tried to restructure an unlisted private company which is simpler than the listed public company due to regulatory compliance procedures.
  • Currently, the Vedanta Group has a $ 1.9 Billion principal repayment amount in the financial year of 2021. The Delisting process will help to relieve the debt repayment and to attain economic stability for the company.
  • Their strategy is fundraising from options like Strategic Buyout (SBO) etc, which can be easier for unlisted companies. Moreover, the Promoter found that the current market value price is more profitable for delisting their company.
  • The floor price (Rs 87.5),  is less than half of its original book value (Rs 193), and the current market value is also far less than book value. So, since the current market price is less, delisting and paying off to the public shareholders will not result in high cash-out.

These are some of the key elements to be considered by the Vedanta group before delisting; similarly, each company has to assess their business situation before opting for  delisting 

The business environment is always dynamic, and everything is a time-bound process; these new regulations make voluntary delisting an easier procedure. This enhanced transparency and will develop confidence among the shareholders and investors. 

The Delisting Regulations of 2021 has given the Delisting Exemption for the listed subsidiary company to be delisted by its parent holding company, which are in the same line of business, thereby SEBI with its policy objective of regulating exit options of the minority shareholders of listed companies.

The Delisting Exemption will help the holding parent company achieve a targeted merging process without having to go for lengthy approvals, reduced regulatory compliances and unnecessary compliances costs, and a simple reverse book building process. However, a  further lock-in period of three years for re-listing will encourage the companies to take careful steps based on their business needs which can be considered as a step towards business-friendly regulations. This would enable the companies a quicker and more flexible exit from the public exchanges.  Thereby allowing them to concentrate more on their business opportunities rather than lengthy documenting procedures.

This article is a simple outline, and the content is only for general information. They do not provide any piece of advice or any legal opinion to anybody and express purely personal views. It is based on relevant law and/or facts available and has been prepared with due care and accuracy and is reliable. Readers are requested to recheck and refer to all relevant provisions of respective statutes and regulations, latest judicial pronouncements, circulars, clarifications etc., before acting based on the above article information.  The possibility of other views on the subject matter is possible based on individual interpretation of those subjects.

  1. https://taxguru.in/finance/voluntary-delisting-process-advantages-explained-vedanta-planning-delisted.html 
  2. http://www.lawstreetindia.com/experts/column?sid=578

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