Sebi eases delisting rules to boost M&A activity

Start-up founders allowed more leeway to retain control of their firms

The Securities and Exchange Board of India (Sebi) on Tuesday eased the delisting framework — a move seen as boosting merger and acquisition (M&A) activity in the country. It also cleared the framework to roll out social stock exchanges and gold spot exchanges.

The Sebi board also tightened the norms on related-party transactions (RPTS) to prevent their abuse. Besides, rules on the issuance of shares with superior voting rights were relaxed to allow the founders of unlisted technology companies more leeway to retain the control of their firms by raising capital.

Acceding to the long-pending industry demand, the market regulator allowed an acquirer to launch both the open offer and delisting bid simultaneously. Experts said the change in delisting rules removed the lacunae in the existing framework.

Currently, an entity acquiring control in a listed company has to make a mandatory open offer to buy a 26 per cent stake from public shareholders. Following the open offer, if 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,” said Vikram Raghani, partner at J Sagar Associates.

“For the 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 Raghani.

The framework permitting the simultaneous open offer and delisting bid 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.

RPT norms 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.

“RPTS 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.

Superior voting rights

In 2019, Sebi had issued a framework for the issuance of superior voting rights shares. However, not many companies were able to take its advantage as it was considered too restrictive. Earlier, such shares could be issued only by individuals who were part of a promoter group with net worth of less than ~500 crore. The threshold has now been increased to ~1,000 crore.

Framework for gold spot and social stock exchanges

The regulator paved the way for setting up ‘gold spot’ and ‘social stock’ exchanges in the country. Gold traded on 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 on exchanges.