The Securities and Exchange Board of India (Sebi) on Tuesday eased the delisting framework – a move seen as boosting M&A activity in the country. The Sebi board also cleared the framework to roll out social stock exchanges and gold spot exchanges in the country. The market regulator also tightened the norms around related party transactions (RPTs) to prevent their abuse. On the other hand, rules around issue of shares with superior voting rights were eased to allow the founders of unlisted technology companies more leeway to retain control in their firms by raising capital.
Ceding to the long-pending industry demand, the regulator allowed an acquirer to launch both the open offer and delisting bid simultaneously. Experts said the change in delisting rules remove the lacuna in the existing framework.
Currently, an entity acquiring control in a listed company has to make a mandatory open offer to buy 26 per cent stake from public shareholders. If following the open offer, the promoter shareholding increases beyond 75 per cent, the acquirer has to bring it down to below the 75 per cent threshold before attempting a delisting bid, which again requires the acquirer to hike its stake to 90 per cent.
“The delisting reform proposed by Sebi takes away a big hurdle in public M&As which until now disallowed acquirers to delist a target company seamlessly. For the first time First time an acquirer can now attempt a delisting by offering what they believe is a commercially reasonable price without having to worry about an exorbitant price thrown up by the reverse book building method,” said Vikram Raghani, Partner, J Sagar Associates.
The framework permitting simultaneous open offer and delisting bids has several checks and balances to ensure the rights of public shareholders are protected. For instance, the acquirer will have to disclose the intent to delist upfront at the time of making an open offer. Also, acquirers will have to disclose two separate offer prices—one for open offer and one for delisting.
“If the response to the open offer leads to the delisting threshold of 90 per cent being met, all shareholders who tender their shares shall be paid the same delisting price and if the response to the offer leads to the delisting threshold of 90 per cent not being met, all shareholders who tender their shares shall be paid the same takeover price,” said Sebi in a release.
RPTs get tougher
Sebi tightened the definition of what would qualify as RPTs and also extended it to transactions with shareholders holding 10 per cent or more in the company.
“RPT are misused by many entities in various ways, including siphoning of funds. Hence, there was a need to tighten the framework and safeguard the minority shareholders,” Sebi chairman, Ajay Tyagi said while addressing the media following the board meeting.
“The move to amend the definition of related parties is to ensure higher corporate governance standards for RPTs in listed companies, especially, with entities which are related or connected to the promoter group.
Such RPTs will undergo a greater scrutiny as they will require audit committee approval,” said Manendra Singh, Associate Partner, Economic Laws Practice.
Superior voting rights
In 2019, Sebi had issued a framework around issuance of SR shares. However, not many companies were able to take its advantage as it was considered too restrictive. Earlier, an SRs could be issued only by individuals who were part of a promoter group with net worth of less than Rs 500 crore. The threshold has now been increased to Rs 1,000 crore. Further, the minimum gap between issuance of SR shares and filing of IPO document reduced to three months from the earlier requirement of six months.
Framework for ‘gold spot’ and ‘social stock’ exchanges (SSE) approved
The regulator also paved the way to set up ‘gold spot’ and ‘social stock’ exchanges in the country. Gold traded in the proposed exchanges will be called an ‘electronic gold receipt’. Sebi has said the trading, clearing and settlement will be similar to other securities currently traded one exchanges. Meanwhile, a SSE shall be a separate segment of the existing stock exchanges. Both for-profit and not-for-profit entities will be allowed to raise capital for social causes on this platform. Also, silver becomes the second commodity after gold that investors will be able to buy through the mutual fund route as exchange traded funds (ETFs).