The current global crisis and its resulting uncertainty have shaken the strongest of economies and organisations. However, these times also create a host of opportunities, the delisting of stocks being one of them.
Need for delisting
Given the sharp fall in capital markets, promoters are evaluating the delisting of securities to run their businesses more flexibly, outside the scrutiny of the regulators and the public. Delisting is also an opportunity for promoters of multinational companies having listed subsidiaries to deploy funds at current valuations. Considering the increased reporting requirements and shifting of tax base on substance over form, various Multinational Companies are revisiting their global structures and exploring alternate jurisdictions for raising funds, leading them to evaluate delisting in some jurisdictions.
The on-going debate of increasing the minimum public shareholding of listed companies from present level of 25% to 35% has induced certain promoter-driven companies to evaluate the delisting of securities rather than relinquishing further stake. In addition, in some cases, stocks are being delisted from defunct regional stock exchanges, whereas the company continues to be listed on recognised stock exchanges with nationwide trading terminals.
Primarily, the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 governs the process of delisting. A company can delist its shares from the stock exchange, wherein the delisting price is determined by reverse book building process, with the floor price determined basis the historical traded price of the company as specified in the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 2011.
However, there are other ways of delisting a company, which include the traditional method of amalgamation of one listed company into another private company, leaving the transferor liquidated. In addition, some companies have been exploring novel ways of delisting by, squeezing out public shareholders by issuing unlisted non-participating redeemable preference shares in lieu of listed equity shares. Such preference shares are redeemed in a defined time period. Both the above processes involve a scheme of arrangement and require the prior approval of the Securities and Exchange Board of India (SEBI).
Carve outs from delisting regulations
In addition, to escalate the delisting process of listed subsidiary companies, the SEBI has recently introduced a Consultation Paper on “Amendment to Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009.” It states that the listed subsidiary of a listed parent company can be delisted from the stock exchange by swapping shares of the listed subsidiary company with the shares of the listed holding company. This process has to be run like a merger process, requiring the approval of the National Company Law Tribunal (NCLT). However, in the absence of any specific exemption for such a share swap transaction, capital gain tax liability and recipient taxation may arise in the hands of various stakeholders in relation to such a transaction.
Taking cognisance of the changing times and the burden of escalating non-performing assets, the delisting regulations provide carve outs for delisting proposed in a resolution plan sanctioned under the Insolvency and Bankruptcy Code, 2016. In such a case, the NCLT oversees the delisting process, ensuring fair discharge of consideration upon exit to minority shareholders.
The other side – shareholders’ view
Although a company can be delisted by various means, the common thread among all these mechanisms is the embedded safeguards to protect the interests of public shareholders. Presently, two-thirds of public shareholders have to vote in favour of delisting shares to initiate the delisting process. An independent due diligence by a merchant banker of the past trading activities of promoters and the corporate actions of the company attempts to make the entire process fair and reasonable.
From the taxation perspective, capital gain tax would arise in the hands of shareholders on the sale of equity shares pursuant to delisting. However, they could obtain the benefit of grandfathering of cost base, introduced by the Finance Act, 2018, for shares acquired before 1 February 2018.
To sum up, the delisting process is contingent upon the blessings of stakeholders. Historically, few multinational companies, such as the UK-based BOC Group, tried to delist its Indian arm, Linde India, but failed after investors sought more than four times the floor price offered, collapsing the delisting attempt. However, with the current uncertainty in the stock market, India Inc believes that delisting opportunities will now receive higher levels of participation from public shareholders, thereby, improving the chances of delisting. One eye-catching performance will be of Vedanta Limited, whose promoters have announced delisting, and the company is now arranging funds for this process. Also in line is Adani Power Ltd and the major spirit maker Diageo Plc, which is exploring options to delist its Indian arm, United Spirits.
The dilemma here is whether delisting is an opportunity for public shareholders or another dent to their falling portfolios. On the one hand, delisting would help promoters establish control over their companies and undertake any restructuring plan with limited scrutiny from the public and regulators. The well-grown network of private equity investors, available in abundance, makes delisting an even more tempting opportunity for promoters. On the other hand, the low market price of stocks, influenced by uncertainty, may not provide the real worth of the investments made by public shareholders.
Author: Falguni Shah-Partner Deals, PwC India and Vivek Joshi –Associate Director, Deals, PwC India
Associate Director, Deals,
The views expressed in this article are personal. The article includes input from Chandni Agarwal – Assistant Manager, Deals, PwC India.