Skip to main content

This isn’t Hotel California! Sebi’s new delisting rules signals maturity of Indian equity market

 “Why should we say that once you are listed you can never leave. This isn’t Hotel California. This is a rich, vibrant market. We welcome people, but if for some reason they need to exit, they must be able to” Sebi chairperson Madhabi Puri Buch said this week. And why shouldn't we all agree with this very welcome statement. Over the years, our capital markets have undergone a substantial evolution and transformation. This evolution encompasses technological advancements, regulatory changes, as well as the expansion of market depth and engagement. The maturity of a market is exemplified by the smooth entry and exit experience it provides to investors and issuers alike. This week not only did we overcome a 17 year wait to get into the World Cup final, but we also overcame a waiting period of 19 years to gain freedom from RBB mechanism for delisting of a company. In our views of January 2020 titled ‘Our expectations from Budget 2020’, we had advocated for the removal of RBB process for price discovery at the time of delisting. The existing SEBI Delisting Regulations had made the process cumbersome by requiring RBB for price discovery.

 

SEBI, in its latest board meeting, approved significant reforms to streamline the delisting process in India. This is expected to enhance market efficiency, eliminate speculation and protect the interests of public shareholders. These changes have already been deliberated with market participants as a part of the consultative process and therefore I anticipate minimum challenge at implementation stage. Currently, achieving the 90% threshold through Reverse Book Building (RBB) is crucial for successful delisting. However, there were concerns about potential manipulation during price discovery. It has been observed that certain operators may corner shares upon the announcement of delisting, collectively holding more than a 10% stake. This inevitably requires their participation to reach the 90% threshold, resulting in a potentially inflated discovered price that may not accurately reflect the stock's fair value. In order to curb market speculation and ensure fairness in valuation, SEBI has now introduced the right framework for a fixed price offer for delisting the company.

 

This represents a welcome and decisive move by SEBI to overturn the practice of RBB introduced in 2003. Under the proposed framework, the acquirer will be able to make a fixed price offer which should be at least 15% premium to the floor price as determined under Delisting Regulations. However, SEBI has added a layer of complexity by introducing the concept of adjusted book value as determined by an independent registered valuer. The market price serves as the ideal gauge for assessing the fair value of a frequently traded stock. Therefore, in my view, the addition of adjusted book value is anunnecessary inclusion. A good change is that the reference date for floor price has been rationalized as the date of public announcement against the date of board meeting presently. This will ensure that unaffected share price is taken into consideration for the purpose of calculating floor price. SEBI has also tweaked the framework for eligibility and pricing under counter offer. To clarify, a counter offer is used in cases of reverse book-building (RBB) scenarios where the price proposed by investors after successfully crossing 90% is deemed unacceptable to the acquirer.

 

SEBI has proposed that acquirers will be eligible to make counter offers on achieving 75% shareholding provided that 50% of public shareholders have tendered their shares during RBB. This is a positive development given acquirers who were not able to achieve 90% during RBB are now eligible to make counter offers while shareholders interest is protected by ensuring 50% of public shareholding has participated in the tendering process. However, SEBI has also modified the pricing mechanism under the counter-offer framework by providing that counter offer price should be above VWAP of the shares tendered during the RBB process. The downside to this is that it will provide an opportunity to the speculators to unnecessarily bid at a higher price during the RBB process in order to inflate the counter offer price. Overall, SEBI has made a commendable decision by introducing an alternative to the reverse book building mechanism. This will not only provide greater flexibility for group restructuring for corporates but also enhance the investor confidence in the Indian capital markets.

 

-Economic Times 01st July, 2024.

Comments

Popular posts from this blog

RBI deputy governor cautions fintech platform lenders on privacy concerns during loan recovery

  India's digital lending infrastructure has made the loan sanctioning system online. Yet, loan recovery still needs a “feet on the street” approach, Swaminathan J, deputy governor of the Reserve Bank of India, said at a media event on Tuesday, September 2, according to news agency ANI.According to the ANI report, the deputy governor flagged that fintech operators in the digital lending segment are giving out loans to customers with poor credit profiles and later using aggressive recovery tactics.“While loan sanctioning and disbursement have become increasingly digital, effective collection and recovery still require a 'feet on the street' and empathetic approach. Many fintech platforms operate on a business model that involves extending small-value loans to customers often with poor credit profiles,” Swaminathan J said.   Fintech platforms' business models The central bank deputy governor highlighted that many fintech platforms' business models involve providing sm

Credit card spending growth declines on RBI gaze, stress build-up

  Credit card spends have further slowed down to 16.6 per cent in the current financial year (FY25), following the Reserve Bank of India’s tightening of unsecured lending norms and rising delinquencies, and increased stress in the portfolio.Typically, during the festival season (September–December), credit card spends peak as several credit card-issuing banks offer discounts and cashbacks on e-commerce and other platforms. This is a reversal of trend in the past three financial years stretching to FY21 due to RBI’s restrictions.In the previous financial year (FY24), credit card spends rose by 27.8 per cent, but were low compared to FY23 which surged by 47.5 per cent. In FY22, the spending increased 54.1 per cent, according to data compiled by Macquarie Research.ICICI Bank recorded 4.4 per cent gross credit losses in its FY24 credit card portfolio as against 3.2 per cent year-on-year. SBI Cards’ credit losses in the segment stood at 7.4 per cent in FY24 and 6.2 per cent in FY23, the rep

India can't rely on wealthy to drive growth: Ex-RBI Dy Guv Viral Acharya

  India can’t rely on wealthy individuals to drive growth and expect the overall economy to improve, Viral Acharya, former deputy governor of the Reserve Bank of India (RBI) said on Monday.Acharya, who is the C V Starr Professor of Economics in the Department of Finance at New York University’s Stern School of Business (NYU-Stern), said after the Covid-19 pandemic, rural consumption and investments have weakened.We can’t be pumping our growth through the rich and expect that the economy as a whole will do better,” he said while speaking at an event organised by Elara Capital here.f there has to be a trickle-down, it should have actually happened by now,” Acharya said, adding that when the rich keep getting wealthier and wealthier, they have a savings problem.   “The bank account keeps getting bigger, hence they look for financial assets to invest in. India is closed, so our money can't go outside India that easily. So, it has to chase the limited financial assets in the country and