Private Equity is playing a crucial role in boosting the Indian Economy. According to the Indian Private Equity Report 2019 published by Bain & Company, the private equity investment momentum...
Delisting of Equity Shares means the permanent removal of shares of a listed company from any of the stock exchange where it is listed. The public company grows and develops by utilizing the capital of public shareholding.
The highest risk is with bottom players of pyramids who are Equity shareholders. The primary reason to take up this risk is that the listed companies provide an easy way of quieting from the market because the shares can be sold in the secondary market.
Listed companies have a lot of compliances and the market regulations are strict enough to facilitate safeguarding shareholders’ interests against unfair practices. Whenever a company decides to go corporate privatization, shareholders are exposed to risk position since the available market in the form of a stock exchange is being taken away.
Meaning of “Delisting of Equity Shares”
Delisting means the shares listed on a stock exchange will no longer be traded in the stock market and the company becomes a private company. It is also known as the “reverse book building process” since it’s a reverse procedure of listing.
Delisting means the permanent delist of securities from the stock market. Delisting is an entirely different concept from suspension or withdrawal of admission to dealing with listed shares.
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Statutory provisions for regulating the public issue
Delisting of securities is governed by Chapter III, IV and Schedule II of SEBI (Delisting of Equity Shares) Regulations, 2009 and SEBI (Delisting of equity shares) (Amendment) Regulations, 2015.
Types of Delisting
There are two types of delisting with different procedure from each other:
- Voluntary Delisting: when a listed company seeks for delisting of its shares from the stock exchange voluntarily.
- Compulsory Delisting: when a listed company is compelled by a stock exchange to delist its shares.
1) Voluntary Delisting
Following are the step by step procedure for delisting:
a) Board Meeting
Call & hold the meeting & pass the necessary resolution of the approval of delisting of security from the stock exchange.
b) Intimation to the stock exchange
Inform the stock exchange about the decision of the board meeting for approving the delisting of equity shares.
c) Pass the necessary Special Resolution
Prior approval of all the shareholders must be taken by SR passed through postal ballot, disclosing all the material facts of delisting. Resolution is said to be passed if votes for the resolution is two times the number of votes cast against it.
d) Application for In-Principal approval
The company needs to apply as per the prescribed form for seeking in-principal approval from the stock exchange.
e) In-Principal Approval
The recognized stock exchange needs to dispose of with an application within 5 days of receipt of an application & shall grant in-principal approval after considering & being satisfied with the following grounds:
- Resolution of all the grievances filed by an investors
- Payment of listing fees
- Compliance of listing agreement
f) Merchant Banker
The promoter has to appoint one merchant banker registered with SEBI or any such other intermediary.
g) Fixation of the floor price
Fix the floor price after determining the offer price through the book building method.
h) Opening of an Escrow Account
The promoter needs to open an escrow account and deposit the amount of consideration based on floor price & a number of equity shares outstanding with public shareholders.
i) Public announcement
Promoter within one working day from getting in-principal approval from stock exchange shall make a public announcement in one English, one Hindi & one vernacular language newspaper of the region where the recognized stock exchange is located with following material information:
- Floor price
- Offer price
- Opening & closing dates of an offer
- Manner of accepting an offer
- Name of the stock exchange from where shares are delisted
- Minimum acceptance conditions
- Name & details of merchant bankers
- Objects of the proposed delisting
- Details of escrow account & amount deposited therein
- Shareholding pattern after delisting
- Statement of a declaration by BOD stating that the company has complied with all the provisions of securities law.
j) Specified date
A date within 30 days of public announcement shall be specified on which the names of all the shareholders to whom the offer letter shall be issued.
k) Dispatch Letter of Offer
Not later than 2 working days from the date of the public announcement the company has to send LOO to its public shareholders.
l) Duration of the Bidding period
The offer shall be opened within 7 working days of public announcement & shall be remained open for at least 5 working days during which the public shareholders can bid.
m) Public announcement
After the completion of an offer, the final price is the price that is quoted by the majority of shareholders. If that price is agreed upon by the promoters, they make a public announcement announcing the acceptance of the final price.
n) Successful offer
An offer is deemed to be successful if the shareholding of the promoter combined with the shares accepted through bid reaches the higher of the following:
- 90% of the shares issued of that class
- Aggregate percentage of pre-offer promoter shareholding plus 50% offer size.
o) Final price
If the final price is accepted by the promoter, the additional fund is transferred. Such additional fund is the difference between the price of per share as per the final price & floor price multiplied by a number of shares.
p) The final application to the stock exchange
After completion of payment, the final application is sent to the stock exchange within one year from the date of passing SR requesting delisting of shares.
2) Compulsory Delisting
A company is compulsorily delisted by the stock exchange as a penal measure in case a listed company fails to comply with regulations & provisions of listing agreement. Rule 21A of Securities Contract Regulations Act lays down the following reason for compulsory delisting:
- If the company has incurred losses for consecutive three years & has a negative net worth
- Trading is suspended for more than 6 months
- Shares are traded not very frequently in the last 3 years
- Director or any officer in charge has been convicted for 3 years or more for non-complying with regulations of SEBI.
Why does the company opt for Voluntary Delisting?
Following are the various reasons explaining company opting for voluntary delisting:
- Control: The promoter wants complete control of the business.
- New investors: Their strategic buyout for new investors to be in control & charge of the business.
- Market value: The market value does not reflect the true & fair picture of an entity anymore.
- Corporate restricting: Delisting is one of the methods for Corporate restructuring
- Stockbroker: They act as middlemen who invite the public to subscribe for the shares of the company.
- Fundraising: There is an unsatisfied fundraised from the capital market.
Promoters who are engaged in the delisting of equity shares shall not indulge in any scheme or activity to defraud its shareholders in connection to the exit scheme. Shareholders shall be given proper exit opportunities following rules & regulations of Delisting regulation.
Shares shall be priced properly as if they are too under-priced shareholders won’t surrender their shares and requirement of promoter’s holding of 90% of post issue will not have complied.