The Road To Take-Private In India: What’s The Most Efficient Route For Deal-Making?

The Road To Take-Private In India: What’s The Most Efficient Route For Deal-Making?

Key Takeaways

  • Fixed price delisting debuts as an alternative to RBB, but lackluster in the absence of counter-offer ability
  • Reverse Book Building (RBB) made a bit more palatable with easing of counteroffer mechanics, yet route continues to remain inadequate
  • All or none take privates under Regulation 5A (Takeover Code driven delisting) works on paper, but continues to remain a challenge in practice
  • Adjusted book value mechanism – much needed for asset heavy companies

Join us for our webinar on New Delisting Amendments: What really changes for dealmaking? | Friday, 05 July, 2024, as we delve into the nuances of these changes and deliberate on some commercial realities of delisting in India.

Introduction

This isn’t Hotel California, remarked the SEBI Chairperson last week while making way for some significant changes to take-private or the delisting regime in India. ‘Why should we say that once you are listed you can never leave…’, Madhabi Puri Buch said.

The interpretation of Eagles’ classic song might be debatable. But what isn’t is the consistent challenges that acquirers and promoters have faced in their attempts to delist a company. The failures can largely be attributed to either a lukewarm response from public shareholders or an expensive outcome for acquirers while determining the delisting price.

To address these hurdles, SEBI has now made some significant changes to the delisting regime. The changes are the outcome of the consultation paper which was floated by the regulator in August last year (“Consultation Paper”).

So, for an acquirer looking to do a take-private deal in India, here’s what the regulatory landscape looks like:

Take It or Leave It aka Fixed Price

An acquirer can offer a fixed exit price to all shareholders which is at least 15% premium over the floor price.

Fixed price delisting doesn’t come with counter-offer ability: In our reading of the changes in the SEBI press release, acquirers will not be able to revise the price if it gets rejected. The Consultation Paper as well as the SEBI board minutes talk about the ability to make a counter-offer only in reference to the price discovered through the RBB.

The absence of a counter-offer mechanism will make the fixed price delisting a one-shot attempt with a yes/no answer for the public shareholders.

Fine print yet to come. It’s unlikely that the fine print notifying this amendment will include the counter-offer option in the fixed price route. In a fixed price delisting, the acquirer is galvanized to make its best offer. If the counter-offer mechanism is added to fixed price delisting, we do not see why anyone would go for the second option, that is the RBB.

The Unpopular Choice aka Reverse Book Building

Price discovery is always a challenge, especially in case of a fixed price delisting where the acquirer is further hamstrung by the inability to even make a counter-offer. Unless the acquirer has the boldness to go for a fixed price delisting, he may need to engage with public shareholders to discover the exit price through the RBB route. The rough edges of the RBB route have been softened given the recent changes, though there’s not much to write home about.

To recap, under the RBB process, a floor price is disclosed. The acquirer can also provide an indicative price which is higher than the floor price. The public shareholders then tender their shares indicating a price at which they’d be willing to exit at. At the end of this process, if the acquirer does not reach 90% shareholding, the delisting fails. But if the post-offer shareholding reaches 90%, the discovered price is determined. If this discovered price is not acceptable to the acquirer, it can make a counter-offer to the public shareholders, who have the option to accept or reject it. The delisting is considered successful if the acquirer reaches 90% shareholding.

Most delisting attempts in India have in fact faced rather unfortunate endings. Either the requisite number of 90% tendering isn’t achieved, or when it is, the price is so exorbitant that the acquirer shies away from the trade. SEBI of course has been observant of the challenges.

So, the regulator has now lowered the thresholds to make counteroffers to increase the likelihood of a successful delisting offer, hoping to solve for at least one leg of the problem.

Going forward, the threshold for making a counteroffer will be 75% (from 90% earlier) provided that at least 50% of public shareholding has been tendered.

The reduction of threshold from 90% to 75% might be seen as a positive development compared to the existing position. Although, it’s unclear why the thresholds are required in the first place since the SEBI (Delisting of Equity Shares) Regulations, 2021 (“Delisting Regulations”) clearly provide for shareholders’ approval through a special resolution1 when a delisting is proposed. When the shareholders have already consented to the delisting, there should be an option to extend the counteroffer without having to cross the 75% threshold. This just seems like an additional procedural requirement and lacks any inherent purpose.

Is All or None Take-Private Possible....Enter, Regulation 5A

Fixed price and RBB routes are voluntary delisting options available to existing promoters. For third party acquirers or non-promoters, there exists the Regulation 5A option under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”).2 It allows the acquirer to combine the delisting and takeover offer.

In brief, the acquirer must disclose the intention to delist. It has to indicate the open offer price as per Takeover Code, and an indicative delisting price which should include a suitable premium.

However, if the delisting fails, then, the acquirer will need to complete its open offer under Regulation 5A.

On a plain reading of the Takeover Code, can an all-in or all-out open offer be engineered by a third-party acquirer? Yes, by making it a conditional offer and linking the conditionality to tendering of 90% shareholding.

Would this effectively mean that if the delisting fails, the open offer will also in all likelihood fail? Yes. Would SEBI have a reservation with such a structure though? We think yes. The scheme of a ‘conditional offer’ could not have been to allow the 75% mark to be breached, since every listed company is mandatorily required to have a free public float of 25%. In fact, something similar was attempted in the Blackstone – R Systems delisting attempt, but the conditionality was eventually dropped (presumably basis SEBI’s reservation).

So, what is the sum and substance? Acquirers will have to factor in the risk of remaining a promoter of a listed company if the delisting fails, which could be quite a disincentive.

Delisting fails, but the acquirer still forced to become a shareholder

Take for instance SPAC XYZ wants to acquire and take private a ListCo. If the SPAC is able to acquire 90% of the shares at an amenable price, SPAC consummates the take private. However, if the SPAC fails to reach the 90% threshold, then, the Takeover Code (Reg. 5A r/w Reg. 193) could be used to allow the SPAC to make a conditional open offer such that the SPAC walks away freely with nothing to do with the ListCo by linking the conditionality to 90% shareholder tendering – essentially what we call as the ‘all or none’ optionality.

Unfortunately, that’s not how the regulations are likely to work. The regulator is likely to require the SPAC to limit the conditionality of minimum acceptance to 75% (and not 90% as it may have wanted for delisting) on the grounds that public shareholding of a listed company should always be 25% or greater. So, the SPAC may still need to make and consummate the open offer if 75% shareholders tender, never mind the failed delisting attempt – thus leaving the SPAC as a promoter shareholder in the ListCo, a result the SPAC never wanted.

To summarise therefore, in the current scheme of things, an ‘all or none’ take private attempt may have its own set of challenges.

Though the fine-print is awaited, below is a quick summary of how the regulatory mindset has evolved since our most recent note on the Consultation Paper. 

Consultation Paper Table
Consultation PaperBoard Minutes
Introduction of fixed price delisting mechanism as an alternative to the RBBFixed price offered by an acquirer must be at least 15% higher than the floor price determined
If the RBB Price is not accepted by the acquirer or if the 90% threshold for post-offer shareholding, the acquirer would have the option to make a counter-offer if the bids received are higher of:
a. the difference between the acquirer’s shareholding and 75% of the total issued shares of the company; and
b. 50% of the public shareholding
Reduction in threshold for making a counter-offer from existing 90% to 75% provided that at least 50% of public shareholding has been tendered.
[Note: Remains the same as that mentioned in the Consultation Paper. This just eases the language]
The counter-offer price will be required to be the higher of:
i. VWAP of the shares tendered/offered in the RBB; and
ii. the initial floor price disclosed and calculated for the RBB
The counter-offer price shall not be less than the higher of:
i. VWAP of the shares tendered/offered under the RBB process, and
ii. indicative price, if any, offered by the acquirer
An additional parameter, termed “adjusted book value”, was proposed for calculation of floor priceAn additional parameter, termed “adjusted book value”, was proposed for calculation of floor price except for the Public Sector Undertakings
Modification of the reference date for computing floor price from existing requirement of approval of the board to the date of initial public announcement for voluntary delistingRemains the same

1 Regulation 11(1) of Delisting Regulations.

2 Regulation 5A of Takeover Code: Delisting Offer.

3 Regulation 19 of Takeover Code: Conditional Offer.

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  • Transferring a majority-revenue generating business into a private subsidiary (hiving off) and raising funds at the subsidiary level is increasingly seen as a preferred alternative to direct listed acquisitions or slump sales
  • Hiving off may result in a ‘holding company discount’ and public shareholders lose out on value…
Threat of valuation litigation in Public M&A – Carlyle-PNB Effect! 

Threat of valuation litigation in Public M&A – Carlyle-PNB Effect! 

  • SEBI floor price prescription in case of fund raises should not automatically dislodge directors’ duty to exercise independent judgment and maximise shareholder value
  • Target boards to proactively consider appointing an independent banker and running a robust auction process for capital raises…

Research Paper

Public M&A: Do List Cos Really Need Omnibus RPT Approvals?

Public M&A: Do List Cos Really Need Omnibus RPT Approvals?

  • There seems to be an overlap between regular RPT approvals and omnibus approval routecreating ambiguity on what type of approvals must be procured for long term related partycontracts?
  • Listed companies often enter into long term contracts with…
Should Offshore Funds Appoint Directors?

Should Offshore Funds Appoint Directors?

The issue of director duties and attendant liabilities has been a subject of immense debate as the role of directors evolves in the Indian context. India is perhaps a decade behind the west in this evolution process, though rapidly catching up driven by increasingly proactive proxy advisory firms and institutional capital taking significant positions in Indian companies, though activist funds are still a rarity. Transcendence from ‘complying with their obligations’ to ‘performing their duties’ has probably been most transformational and manifested only in the past couple of years…

Tax Structuring & Litigation

Analysis

Ambiguity with thin cap norms: Private credit players risk significant tax leakage

Ambiguity with thin cap norms: Private credit players risk significant tax leakage

  • Accurate reading of thin capitalization norms is highly relevant to maximize IRRs, especially in asset heavy sectors
  • Currently, norms interpreted such that sometimes the entire interest paid to foreign related parties is disallowed for the target (as expense)…
Private Credit: Interest on NCDs recharacterized as dividends 

Private Credit: Interest on NCDs recharacterized as dividends 

  • Tax authorities recharacterized interest income on NCDs as dividends
  • Interest recharacterization has not taken place under GAAR
  • Investors can prevent such mischaracterization by demonstrating the nature of the underlying instrument, periodicity of payments, maturity date, management rights,
    etc….
Denial of tax treaty benefits: Blueprinting defence strategies for PE funds – A tax litigation perspective

Denial of tax treaty benefits: Blueprinting defence strategies for PE funds – A tax litigation perspective

  • Revenue has issued reassessment orders to several global PE/VC funds denying
    tax treaty benefits to grandfathered investments alleging treaty shopping through Mauritius and Singapore between AY 2013-14 and 2015-16

  • Substantial tax, interest, and penalty has been levied invoking judicial anti-avoidance principles based on a supposed lack of commercial substance in these jurisdictions…
Top 5 Tax Considerations When Structuring Debt Investments in India

Top 5 Tax Considerations When Structuring Debt Investments in India

  • Recent developments in the Indian tax regime have brought India closer to global
    norms though hybrid instruments that have come under increased scrutiny

  • GAAR provisions have enabled tax authorities to examine the commercial substance of transactions, underscoring the importance of purpose, pooling, and people…

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