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
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.
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.
1 Regulation 11(1) of Delisting Regulations.
2 Regulation 5A of Takeover Code: Delisting Offer.
3 Regulation 19 of Takeover Code: Conditional Offer.
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.
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.
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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