Going private: A better pathway to delist a business will serve everyone well

The history of delisting in India has been chequered. The basic framework revolves around the principle of reverse book building. Via this process, a firm can exit if public shareholders agree to tender shares at a price that would take the acquirer’s shareholding to at least 90%. 

In case such a price is found, the delisting succeeds. If not, it fails. The only exception to this mechanism is via a court-approved scheme of arrangement, with attendant conditions.

Reverse book-building has evident advantages. In a country where the regulatory framework has evolved to protect minority investors from excesses of the powerful, giving the former a direct say is an obvious choice. 

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Under this regime, public shareholders state the price at which they would be willing to tender their shares. And unless the 90% threshold is reached at that offer price, the company cannot go private. Conceptually, therefore, the interests of the minority seems fully protected.

The experience of taking businesses off the stock market, however, tells an entirely different story. Compared with developed markets such as the US and UK, the failure rate of delisting has been high in India. Typically, it takes a premium of 25-40% over the stock’s market price globally, but investors here are seen to demand about twice the ticker price. 

Multinationals and Indian founders have thus had little success in going private, leaving all shareholders worse off, as delisting in these cases could create more value for principals and also give public owners a better deal than they would get otherwise.

The core reason for this is the fact that the current mechanism lets a small group of shareholders to effectively hold unreasonable sway over the final outcome. 

In many situations, retail investors would be happy to exit, voting in favour of it and making a reasonable offer, only to find the process stymied by a special interest group bent on an extractive price. In terms of impact, therefore, a mechanism that ostensibly protects minority shareholders often ends up compromising their interests.

That apart, this is also a time when India is competing with virtually every developed market in the world to attract businesses to its capital markets. Deal data over the years presents a story of value-driving delisting attempts having hit a pricing wall. 

A 2018 report by the Securities and Exchange Board of India (Sebi) analysing data from 2015 to 2018 revealed that 53% of companies that voluntarily delisted through reverse book-building were delisted at an average premium of 125%. 

Examples abound of discovered prices being at odds with the company’s fundamentals, with some of them even at three times the guidance price, which itself is at a premium to the prevailing market price.

In August 2023, a sub-group of Sebi’s Primary Market Advisory Committee recommended some critical amendments to the delisting framework, one of which was the introduction of a fixed price framework as an alternative to the reverse book-building route. 

Of course, this approach would come with reasonable rule-based protections, with rules on the pricing methodology, minimum float, levels of trading, a majority vote among minority shareholders and more. This is on the lines of regimes that exist in most other markets.

At present, Regulation 37 of India’s delisting rulebook allows a fixed price exit only in specific circumstances. It is perhaps time for regulators to evaluate whether we need a more balanced framework that is less susceptible to misuse and allows businesses to go private in line with global norms.

For one, it will assure all investors greater predictability of outcomes. Second, it will offer public shareholders a better shot at equity monetization. Third, in the long run, it will encourage businesses to enlist on Indian bourses. Remember, India is competing with several other markets. Fourth, it will send a message to shareholders seeking to misuse legal provisions that the law frowns upon mala fide behaviour.

It is heartening to note that at its recent Board meeting, Sebi formally brought fixed price delistings into its regulations. This is in line with the thinking enunciated above.

Historically, reverse book building may have been considered a regulatory safety valve designed to protect the rights of minority shareholders, but India has evolved since then. Evolution has occurred in governance norms and protective devices across various laws.

The principle that the voices of minority shareholders need to be well represented when corporate decisions of this nature are taken is well accepted. It is heartening to see Sebi consider a more predictable regime for the process by which a company can be taken private without minority interests being compromised. 

Effecting such a reform would show the world that India is a jurisdiction that effectively balances the rights and responsibilities of various stakeholders in the ecosystem, and in a fair and transparent manner, without compromising its competitiveness or the ease of doing business.