It is a common perception that the market capitalization of companies during an economic downturn does not indicate the true value of its businesses. This can be attributed to the fact that the decreased prices of shares due to the bearish stock markets may not be an accurate indicator of the company’s valuation. Keeping this in mind, this article discusses the nuances involved in the delisting of shares during the times of economic upheaval in the country. It also dwells on how the promoter of Vedanta Resources Ltd, portrays opportunistic behaviour by announcing the delisting of his company during the objectionable time of COVID-19 pandemic and the drawbacks in the delisting regulations which need to be addressed immediately.
Objectionable timing for delisting of shares
Anil Agarwal, the promoter of Vedanta Resources Ltd., [Vedanta] recently announced plans of extricating his company from the Indian bourses. Currently, the promoter shareholding is 50.14% percent of the company’s shares, and the offer price of Rs.87.50 per share was made to the public shareholders in a delisting offer. While the offer price represents a 9.9 percent premium over the prevailing market price, it is substantially lower than the historic five-year average and the book value of the company. Further, the offer price has failed to consider the value embedded in each share of Vedanta due to its subsidiary Hindustan Zinc Limited which is an absolute cash cow for Vedanta.
It is pertinent to note that the offer price made to the public shareholders by Vedanta is less than half of the fifty-two week high of Rs.180. The diminished stock price due to the pandemic is being used as a veil by the promoters to overshadow the intrinsic value of the company. Such opportunistic moves made by promoters raise the issue of protection of interests of minority shareholders. Thus, the SEBI (Delisting of Equity Shares) Regulations, 2009 [delisting regulations] must be recalibrated to enable shareholders to claim a fair price on their shareholding in the company. Sudden plans of delisting are also against the interests of long – term shareholders in the company who expect a reward for their long association with the company.
News reports state that companies like United Spirits, Adani Power, and Hexaware Technologies might also follow the footsteps of Vedanta, possibly influenced by the same strategy. The delisting regulations lack provisions that curb the delisting of shares by promoters during the objectionable times of economic distress when the shares are trading at their lowest prices. The failure to curb such practices by promoters can result in heavy monetary losses for shareholders.
Furthermore, the delisting regulations, unlike the SEBI’s takeover code, do not require the company to constitute a committee of independent directors or make representations to the shareholders. This renders the role of independent directors ineffective thereby disabling the shareholders from holding directors responsible for the failure of carrying out their obligations. In addition to this, the method employed by SEBI for the discovery of the delisting price fails in realizing the fair value of the shares held by minority shareholders.
Discovery of delisting price
The delisting regulations prescribe the reverse book building process [RBB] as a means to discover the delisting price.[i] Under this process, public shareholders can quote their bids according to their preferred price. Although, promoters are required to fix the floor price in accordance with delisting regulations[ii], such offer prices tend to diverge from the true value of the company. While the reverse book building mechanism appears as an efficient mechanism to discover the delisting price, various pitfalls need to be addressed. They are stated below:
- The RBB does not specify a price range for bidding and hence allows public shareholders to bid at unreasonably high prices, thereby creating a gap with the bids of other shareholders. Therefore, a price range must be introduced which can be calculated based on the intrinsic value of the company. Further, SEBI must scrutinize the offer price proposed by the company and provide a no-objection certificate for the same to avoid unfair offer prices made by promoters.
- The shareholders who may have recently purchased shares, i.e., just before the delisting proposal may bid at a lower price to make quick profits for themselves. However, this can prove to be unfavourable for the long-term shareholders.
- The issue of information symmetry between the promoters and the public shareholders can force shareholders to make bids which might result in the failure of efficient price discovery. This is due to the fact that the promoters not only possess the information regarding the accurate value of the company during the economic distress but they are also privy to the future value that the company plans to extract after the delisting process is completed.
- If the discovered price is unacceptable to the promoters, they can make a counteroffer to the public shareholders,[iii] but the floor price cannot be below the book value of the company as certified by a merchant banker. This provision can be simplified to mandate the book value of the company as the original offer price instead of the company going through a failed round of price discovery.
Even though the mechanism for discovery of price has various pitfalls, there are other recourses available to public shareholders under the delisting regulations through which they can protect their interests.
Safeguards available to public shareholders
The delisting regulations mandate that the board of directors of the company must approve the delisting offer only if the delisting is in the best interests of the shareholders. Moreover, the Companies Act, 2013 [iv] imposes fiduciary duties on the directors to protect the interests of shareholders. The decision to delist the company is a perfect example where the conflicts between the interests of the promoters and the minority shareholders can be witnessed. Therefore, in such cases, the independent directors of the company play a significant role in upholding the interests of the minority shareholders.
Further, for delisting to be successful, the delisting regulations mandate that a special resolution needs to be passed through the means of a postal ballot by the public shareholders. The votes cast by public shareholders in favour of the delisting proposal must be at least twice the number of votes cast by the public shareholders against it.[v] Apart from voting, public shareholders can also decide the fate of a delisting offer by other means. At least 25 percent of the public shareholders holding dematerialized shares must participate in the delisting process as the promoter must meet the post-offer shareholding of 90 percent for the delisting to be successful.
Moreover, delisting can place promoters in a tough spot if the minority shareholders demand a high premium over the existing market price. The failure of the delisting process was witnessed in Linde India’s delisting proposal in June 2019. In this case, after the RBB was completed, the minority shareholders demanded three times the prevailing market price and four and a half times the floor price, which was rejected by the promoters. Hence, through these checks and balances, shareholders can turn down opportunistic delisting offers made by promoters.
Given the prevalent pandemic situation across the country, it is no wonder that promoters of certain Indian companies are choosing the path of delisting due to the slump in the stock market valuations of companies. The power to decide the timing of a delisting offer gives rise to an opportunistic behavior in promoters. They can not only choose a convenient time, i.e. when the shares are trading at a price lower than the intrinsic value of the company, but they can also startle the minority shareholders by giving them a short span of time to react to their delisting offers. This creates an imbalance in power between the promoters and public shareholders in the delisting process.
The author contends that the surge in the number of companies intending to delist is a test for SEBI to rejig the extant regulatory framework to enhance the protection of minority shareholders and fortify the price discovery mechanism. Moreover, this is an ideal time for SEBI to re-evaluate the delisting regulations so as to bring a balance between the interests of promoters, public shareholders, and other stakeholders of companies.
[i] R. 15, SEBI (Delisting of Equity Shares), 2009.
[ii] R. 8, SEBI (Delisting of Equity Shares), 2009.
[iii] R. 16, SEBI (Delisting of Equity Shares) (Second Amendment) Regulations, 2018.
[iv] S. 166 (2), Companies Act, 2013.
[v] R. 8(1)(b), SEBI (Delisting of Equity Shares), 2009.
The author is a final year student at the School of Law, Christ University, Bengaluru.
Picture Credits: Niyantha Shekar
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