Delisting Process: SEBI's fixed price model

The Security and Exchange Board of India (SEBI) has allowed companies to delist via a fixed price mechanism. The earlier process was different and known as reverse book building or RBB.

The move aims to ease of doing business for listed entities. For investors, it is crucial to understand the impact of the changes as some of their holding companies may delist in the future. What happens in such a case? We try to answer everything related to the delisting process.

SEBI's process for delisting of shares: RBB model

Before the current change, SEBI followed the RBB model, and you must understand this model before we move to the new model.

Under the RBB Model, a company looking to delist its shares from the stock exchange would initiate the process by making a public announcement. SEBI regulations mandated a minimum floor price for the delisting offer. The price was typically determined based on a formula considering book value, average market price, and future growth prospects.

Unlike a typical IPO where investors bid for shares, in RBB, shareholders submitted bids stating the minimum price at which they were willing to sell their shares. Through the process, the company and investors discover the price at which a majority of shareholders are willing to exit.

For successful delisting, the acquirer (promoters) needed to acquire at least 90% of the public shareholding. This high threshold ensured a significant majority of public shareholders were on board with the delisting.

SEBI's recent move on the delisting process: Alternative to RBB model

With an understanding of the RBB model, you can feel a need for a new model. One of the biggest challenges with the RBB model - it is susceptible to manipulation. Some investors could buy significant shares before the delisting announcement, then collude and demand a very high price during the RBB, making delisting expensive for the acquirer. Another problem was the lengthy time and complex delisting process. To fix this, SEBI came with a fixed price option.

Under the new model, companies have the option to delist through a fixed-price method. The acquirer proposes a fixed price for delisting, which must be at least 15% above the floor price determined by SEBI regulations. If the initial fixed-price offer fails to garner enough acceptance, and at least 50% of the public shareholding is tendered, a counteroffer option is available.

Here, another entity can propose a higher price to acquire the remaining shares. It reduces the earlier 90% threshold, potentially making delisting easier if a competing offer emerges.

Impact of the new model on investors

Overall, the fixed price mode will positively benefit investors. However, there are some drawbacks to the new model. We start this section by looking at the positives:

• Certainty and Transparency: The fixed-price method offers shareholders greater clarity and predictability compared to the RBB model. They know the exact price upfront and can make an informed decision about whether to tender their shares or not.
• Potentially Higher Price: The fixed price must be at least 15% above the floor price set by SEBI regulations. It could lead to a better deal for shareholders compared to an uncertain RBB process where the final price might be lower.
• Streamlined Process: The fixed-price model can potentially expedite the delisting process compared to the RBB model, which could be time-consuming and complex.

Next, we look at the negatives of the new model. Here are the top two drawbacks:

• Lose future potential: When you invest in a share, your expectation would be to make 5x or 10x returns in the long term. The company has been on the growth path. However, when the company delists under the new model, you only get a 15% premium even though you knew it had higher potential.
• Limited Bargaining Power: Shareholders lose some bargaining power compared to the RBB model, where they could potentially influence the final price through their bids. In the fixed-price model, they either accept the offer or not.

Impact of the new model on the share market

Here are some of the benefits for the entire share price:

Increased Delistings: The simplified process might encourage more companies to consider delisting, potentially reducing liquidity for those stocks and impacting overall market breadth.

Reduced Speculation: The fixed price can discourage speculative buying of shares in anticipation of delisting, leading to potentially less volatile stock prices around delisting announcements.

Way forward

The new model for share delisting is good for investors. However, it will have its own challenges. For example, if the fixed price offer is too low, shareholders may reject it, which will lead to the delisting to fail. Also, market fluctuations can influence shareholder decisions regarding offer value. For companies, it makes things easy - it will boost M&A in India.