Regulation 3 of SEBI (Delisting of Equity Shares) Regulations, 2009
ANALYSIS OF THE PRE-AMENDMENT REGULATION
Regulation 3(1) clarifies the scope of applicability of delisting regulations. It provides that These regulations shall apply to delisting of equity shares of A company from all or any of the recognized stock exchanges where such shares are listed.
Additionally, Regulation 3(2) categorically states exempts any delisting that has been mandated by BIFR pursuant to Sick Industrial Companies (Special Provisions) Act, 1985. The Board for Industrial and Financial Reconstruction, pursuant to its power under section 18(5), has provided for delisting of equity shares of a sick company via rehabilitation scheme of the company sanctioned by BIFR. However, section 3(2) imposes a restriction upon exercise of such power; It stipulates that the exemption from the de-listing regulations can be granted only if the rehabilitation scheme provides for a specific procedure to complete the de-listing or provides an exit option to the shareholders at the specific rate.
EXEMPTION FOR SICA INDUSTRIES
In SEBI order In respect of Vippy Industries Limited , The BIFR had ordered for delisting of the sick company and had directed that the Promoters of the Company to provide an exit option to the public shareholders of the Company and offer to buy-back shares held by such public shareholders at the rate of ¬7.21/- per equity share. Strictly compliance with the Structural Procedure filed by the company was also ordered for. With regard to the exemption of sick companies from the de-listing regulations, SEBI order provides that
“Section 32 of the SICA, which provides that the provisions of the said Act, rules or schemes made there under shall have overriding effect on other laws. Further, in terms of section 32 of the SEBI Act, the provisions of the SEBI Act shall be in addition to, and not in derogation of the provisions of any other law for the time being in force. I also note that in terms of regulation 3(2) of the Delisting Regulations, the said regulation shall not apply to any delisting made pursuant to a scheme sanctioned by the BIFR if such scheme lays down any specific procedure to complete the delisting or provides an exit option to the existing public shareholders at a specified rate.”
Overriding effect produced by the rehabilitation schemes, accompanied by the supplementing nature of SEBI regulations justified an exemption from the delisting regulations. SEBI Act is not a statute exempted from the applicability of section 32 of the SICA. Accordingly, a sick industry, whose rehabilitation scheme complies with the caveat of exit opportunity, is not required to comply with requirement relating to Public Announcement, depositing money in Escrow Account, letter of offer, offer price, bidding period, book building process, Minimum number of shares to be acquired, etc. Hence, the provision by providing a easier regulatory landscape for listed sick industries supplemented SICA which aimed at implementation of suitable measures to revive sick
The Delisting regulations also provide exemption to plans approved by National Company Law Tribunal, pursuant to section 424D of the Companies Act, 1956. The provision empowers the NCLT to approve the scheme for revival/rehabilitation prepared by NCLT. The scope of rehabilitation scheme woven under section 424D is identical to revival schemes produced under the aegis of BIFR. However, these provisions were never notified.
Regulation 3(2) seeks to provide exemption from the delisting regulations, when a competent authority prescribes delisting as a part of revival or rehabilitation scheme. Such a delisting is desirable because an investor looking to invest in a financially strained listed company with an objective to revive it may prefer delisting it to facilitate quick decision making without much public interference. In addition, as there is substantial value erosion in such a company, there may be no value left to pay off the public shareholders. Hence, the exemption provides the benefit of making a listed stressed company more viable for stressed asset investments. It also provides the added advantage of less regulatory roadblocks in implementation of the approved scheme.
AMENDMENT TO REGULATION 3(2)
On 31st May, SEBI amended Regulation 3 and added sub section 3 which provides that
“(3) Nothing in these regulations shall apply to any delisting of equity shares of a listed entity made pursuant to a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code, 2016 No. 31 of 2016, if such plan, –
(a) Lays down any specific procedure to complete the delisting of such share; or
(b) Provides an exit option to the existing public shareholders at a price specified in the resolution plan.
With effect from December 1, 2016, the SICA was repealed by the Sick Industrial Companies (Special Provisions) Repeal Act, 2003. Section 4(b) of the SICA Repealing Act, as substituted by the Eighth Schedule of the Insolvency and Bankruptcy Code 2016 (Code), was also notified with effect from 1 December 2016. However, an absence of categorical exemption from delisting regulations for resolution plans approved by the NCLT led to a regulatory conundrum.
DELISTING IN NCLT APPROVED RESOLUTION PLANS PRIOR TO AMENDMENT
Prior to the amendment, in case a listed entity was proposed to be delisted pursuant to a resolution plan approved under IBC, the provisions of Delisting Regulations were needed to be complied with. This led to emergence of 2 choices for the reconstituted entity.
1. Compliance with the Delisting Regulations.
SEBI (Delisting of Equity Shares) Regulations, 2009 required reconstituted entity to go through the process of Reverse Book Building, for delisting of its shares from all the exchanges, including the exchanges with nationwide terminals. In the Reverse Book Building scenario, the Acquirer/Company offers to buy back shares from the shareholders. It is basically a process used for efficient price discovery. It is a mechanism where, during the period for which the Reverse Book Building is open, offers are collected from the shareholders at various prices, which are above or equal to the floor price. The buyback price is determined after the offer closing date after aggregating all the offers. The floor price is to be calculated based on Regulation 8 of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011SAST. Section 30(2)(e) of the Insolvency and Bankruptcy Code stipulates that the resolution plan should be compliant with all the existing provisions of law. Accordingly, the resolution plan would have been compliant with delisting regulations only post tendering of all the shares offered.
It should be noted that there is no restriction on the trading of shares of an entity undergoing CIRP. Accordingly, the market capitalization can be distorted due to heavy speculation on ground on unavailability of authentic disclosures. Weighted volume average of trading price of last 60 days is one of the criterion for determining offer price or floor price, as per SAST regulation 8. The fallacy of market capitalization can lead to exorbitant capital outflows in share buy backs via reverse book building and adversely affect the fundamentals of a newly reconstituted company under the resolution plan. The recovering entity is left to the mercy of relentless speculative investors. This defeats the purpose of the Code to rehabilitate a corporate debtor through a feasible resolution plan. The speculation involved would make the stressed assets investment less feasible for investors.
2. Applying for an exemption from the delisting regulations.
Regulation 25A provides for a specific exemption/relaxation from strict enforcement of any of the requirements of the Delisting Regulations, similar to one under the Takeover Regulations or ICDR. SEBI may grant specific exemption from compliance of provisions under the Delisting Regulations, upon an application being made by a promoter/acquirer, if it is of the view that the relaxation is in the interests of the investors in securities and the securities market. It is to be noted that the provision lays special emphasis upon the principles of natural justice as it provides that SEBI may after granting reasonable opportunity of being heard to the applicant and after considering all the relevant facts and circumstances, pass a reasoned order either granting or rejecting the exemption or relaxation sought. The determination of what constitutes “the interest of the investors in securities” varies from case to case basis.
In the matter of delisting of equity shares of Assam petro–chemicals limited (asp), ASP decided to delist as Delisting Offer would facilitate the Government of Assam’s proposal to set up an industrial project with higher capital investment . Delisting would help APCL raise funds from private sources through private placement of its equity shares. As the project was expected to provide abundant employment opportunities in the state of Assam, ASP was exempt from once again seeking approval of the Board of Directors to fast track the process. An application to the stock exchange is to be made within 1 year of the special resolution passed by the shareholders approving delisting of securities. Where extension of timelines has been construed as beneficial for the investors, such an extension has been granted by SEBI.
Prior to amendment, where the delisting was mandated by the resolution, exemption could have been applied for by the reconstituted entity on the ground that a resolution applicant will have to pay no money to acquire the public shareholding of the Corporate Debtor, where the liquidation value of the Corporate Debtor is essentially zero. The provision for providing an exit opportunity is rendered nugatory where the amount due to shareholders is nil. Hence, an exemption from the delisting regulations would not have made the investors worse off. Additionally, the timeline for delisting regulations would have hindered stressed assets investments as delisting is often a means for enhanced capital generation through private placement of shares.
Proviso to Regulation 3(3) provides that
• Exit to the shareholders should be at a price which shall not be less than the liquidation value as determined under regulation 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 after paying off dues in the order of priority as defined under section 53 of the code.
• if the existing promoters or any other shareholders are proposed to be provided an opportunity to exit under the resolution plan at a price higher than the price determined in terms of the above proviso, the existing public shareholders shall also be provided an exit opportunity at a price which shall not be less than the price, by whatever name called, at which such promoters or other shareholders, directly or indirectly, are provided exit.
• Provided also that, the details of delisting of such shares along with the justification for exit price in respect of delisting proposed shall be disclosed to the recognized stock exchanges within one day of resolution plan being approved under section 31 of the Code.
According to the amendment, the exit price will be liquidation value minus the dues that need to be paid as per the priority laid down under the code. The liquidation value is to be determined as per the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016CIRP Regulations. The term “liquidation value” is defined under Regulation 35(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution for Corporate Persons) Regulations, 2016 (CIRP Regulations) as ‘the estimated realizable value of assets of the corporate debtor if the corporate debtor were to be liquidated on the insolvency commencement date’.
As per the amendment, public shareholders should at least be paid the liquidation value after payment to all other stakeholders pursuant to the waterfall applicable in case of liquidation. However, once a company has reached a stage where it can no longer pay off its debts or carry on its operations, it implies that the capital of the company has eroded with the shares of the company having lost their value .Further, even if one is to look at the liquidation waterfall, the equity shareholders of a Corporate Debtor are paid only after all the other stakeholders of the Corporate Debtor have been paid out of the liquidation proceeds.