Sebi Makes Price Discovered For Delisting Binding On Promoters

The Securities and Exchange Board of India (Sebi) has tightened regulations with respect to delisting of securities by the promoters.

The market regulator has made it binding on the promoters to accept the delisting price discovered during the reverse book building process. The decision was taken at a Sebi board meeting held late on Thursday.

Going ahead, Sebi says, the promoter will be bound to accept the price discovered through reverse book building, if the same is equal to the floor price/indicative price and will have to disclose their intentions to delist. Also, independent directors will have to guide the minority shareholders of a delisting-bound company by providing a reasoned recommendation on the delisting proposal. The promoter or acquirer will be permitted to specify an indicative price for delisting, which shall not be less than the floor price.

Sebi has also elaborated the role of merchant banker involved in the delisting process.

The decision on delisting of securities attains importance in the backdrop of the recent failure of a delisting offer for Vedanta, a company owned by industrialist Anil Agarwal. The promoter wanted to take the company private on the cheap. They were trying to take advantage of dislocation in the stock price, caused by Covid-19.

The Sebi move will prevent such attempts of the promoter class. Other major reason why majority of the delisting offers fail is the investors’ demand for much higher valuations for letting the company go private. “Reforms in areas such as delisting are pro-public shareholders and will bring about transparency and efficiency in the process,” says Vikram Raghani, Partner, J Sagar Associates.

Sebi has also provided some relaxation with regard to reclassification of promoter shareholding. Promoters with less than 1 per cent shareholding and no ‘control’ will not be required to seek shareholders’ nod for reclassification to ordinary shareholders. Also, the time gap between the date of board meeting and shareholders meeting has been reduced to make the process more efficient.

Sebi has also made several changes to the disclosure requirements for listed companies.

Going ahead, the regulator says, all the video and audio recordings to analysts and institutional investor meets should be made public within 24 hours. The written transcripts of such meetings too will have to be made available with five days.

This change is aimed at mitigating the information asymmetry. Experts think the new mandate will prevent companies from passing on sensitive information to select group of investors, which put small shareholders in a disadvantageous position.

Sebi has extended the formulation of dividend distribution policy (DDP) extended to the top 1,000 companies by market capitalisation (M-Cap).  DDP establishes the principles to ascertain amounts that can be distributed to equity shareholders as dividend by a company as well as enable it to strike a balance between pay-outs and retained earnings to address future needs of the company.

Dividend policy is important because it outlines the amount, method, type, and frequency of dividend distributions. This is true whether the dividend policy is formally stated. Or, informally implied. One of the objectives of the dividend policy is to send signals to current investors to stay on (remain invested) with the company and attract new investors.

The requirement to constitute a risk management committee has also been extended to top 1,000 companies by M-Cap. Currently, both these requirements are mandatory for only the top 500 companies by market value.

The regulator says the Responsibility and Sustainability Report (BRSR) will replace the Business Responsibility Report (BRR). BRSR will become mandatory for the top 1,000 companies by M-Cap from FY23. It is aimed at improving the quality of disclosures, with a special focus on environment, social and governance (ESG).

“New reporting requirements are expected to bring in greater transparency through disclosure of material ESG-related information to enable market participants to identify and assess sustainability-related risks and opportunities. These requirements set the stage for taking a leap for better disclosures in the ESG space in India,” says a statement from the market watchdog.

Sebi has also proposed to change the alternative investment funds (AIF) regulations. It has provided a definition of ‘startup’ as specified by the government to enable investment by angel funds. Also, Sebi has removed the list of restricted activities or sectors from the definition of ‘venture capital undertaking’. This will to provide more flexibility to venture capital funds.

It has also eased the eligibility and listing criteria on the so-called Innovators Growth Platform (IGP), a separate exchange venue for new-age start-ups. At present, for a company to be able to list on IGP, its 25 per cent pre-issue capital needs to be held for at least two years by an institutional investor and other large investors. Sebi has reduced the time to one year.

Also, up to 25 per cent of pre-issue shareholding of ‘accredited investors’ – an individual investor with net worth of Rs 5 crore – will be allowed for the above eligibility criteria. Earlier, a maximum of 10 per cent of pre-issue holding of accredited investor’ was considered for the 25 per cent pre-issue eligibility requirement.

Sebi also allowed companies with superior voting rights to list on IGP. Further, the open offer trigger for companies listed on this platform has been eased from 26 per cent to 49 per cent. Sebi has also made it easy for company to delist or to migrate to the main board – which is the NSE or BSE.

Introduced in 2019, IGP is aimed providing technology-oriented start-ups or companies with early-stage investors a listing opportunity with a much more relaxed framework compared to the mainboard. The platform is yet to see any listing.

Experts say the latest relaxations by Sebi could help the IGP platform to take off.