The Hindu Business Line : Delisting threshold

How can a lower delisting threshold of 75 per cent be fixed for a voluntary delisting offer, when a higher threshold of 90 per cent has all along been applicable for substantial acquisition/takeover.

LET us face it. When it comes to the fixing the delisting threshold for listed companies, the ways of the securities regulator continues to haunt the shareholders. The Securities and Exchange Board of India (SEBI) recently informed e-Serve International that its voluntary delisting offer will succeed if the public shareholding falls below 25 per cent. Based on this, entities belonging to Citigroup Inc US (promoters/persons in control of e-Serve International) are coming out with a voluntary delisting offer to buy out all the outstanding shares from the public. It raises an important question: How can a lower delisting threshold of 75 per cent be fixed for a voluntary delisting offer, when a higher threshold of 90 per cent has all along been applicable for substantial acquisition/takeover under the SEBI Takeover Code.

Through this inexplicable move, SEBI has, at one stroke, diluted some of the good work done through the introduction of SEBI (Delisting of Securities) Guidelines in February 2003. These guidelines were crucial as they introduced two provisions applicable to any promoter planning to delist his stock:

Obtaining the approval of shareholders of a listed company by a special resolution passed at its general meeting.

The exit price for delisting of securities to be arrived at through a reverse book-building process. This book-built process would help determine the final offer price at which maximum number of shares is offered. This is far more transparent, as the shareholders themselves participate through a bidding process to arrive at a "fair" exit price for delisting.

These two provisions are, however, only building blocks for the delisting decision. Unless the delisting threshold is set properly, the best results may not accrue to the shareholders. In this backdrop, the delisting threshold at 75 per cent militates against the interest of shareholders and needs immediate review for a few key reasons:

Voluntary delisting is no different from a takeover under the SEBI Takeover Code. If 90 per cent is the delisting norm under the Takeover Code for delisting, there is no reason to peg this threshold for reverse book-building at a lower level of 75 per cent under the latest SEBI Delisting guidelines. This 90 per cent limit prescribed under the Takeover Code is significant for one more reason. Using the depressed market conditions in 2001 and 2002 companies such as Reckitt Benckiser, Carrier Aircon, Kodak India, Otis Elevator, Sandvik Asia and Philips successfully mopped up all the outstanding equity at a reasonable premium to market price.

In most of these cases, the promoter's holding were between 40 per cent and 49 per cent before they started the takeover exercise, no different from e-Serve's promoter holding at 44.4 per cent. But most shareholders felt that they were bulldozed into accepting these offers as the threat of delisting hanged over their heads.

So, if SEBI's intention is to protect the interest of the investors, it makes no sense to dilute the delisting threshold to 75 per cent.

By setting the delisting threshold at a lower level of 75 per cent, there is a greater possibility of the price discovery process under reverse book building being affected. This is so because of two reasons. First, if we look at the shareholding pattern of e-Serve, we find that institutional investors (FIs, FIIs, insurance companies and banks) hold 30.06 per cent of the equity. If this is added to the promoter's stake, it will add up to nearly 75 per cent. This effectively means that if all these institutions tender to the offer, the e-Serve offer will sail through. It is a clear signal that the retail shareholders (or the public holding an 18.8 per cent equity in e-Serve) may have no choice but to follow the institutional herd.

While there is no doubt that institutions are rational investors who will bid a "fair" price for e-Serve, it may not necessarily translate into the best price for shareholders. Primarily because, the institutions' "fair" pricing may be dictated by return benchmarks (over a shorter time frame) than retail investors.

Second, the promoter making the offer has the option of walking out of the deal if the final offer price is not acceptable to him as the promoters of Astra Zeneca Pharma India recently did. But the same flexibility is not available to the retail shareholders when the delisting threshold is at 75 per cent as the institutional investors can help e-Serve cross this limit.

Though setting the delisting limit at 90 per cent may not solve this problem completely, it will at least aid the price discovery process from the retail investors also in a much more meaningful way.

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