Exit Strategies and Equity Markets: A Critical Analysis of Delisting Mechanisms under SEBI Regulations

Introduction

In a vibrant financial environment, the listing and delisting of securities are important functions to provide market liquidity, investor access, and corporate responsibility. In India, all companies making securities available to the public must seek listing on one or more approved stock exchanges. This is regulated by Section 40 of the Companies Act, 2013, where it is stipulated that a company is required to get the approval of the stock exchange(s) where it intends to list its securities. In addition, any capital collected from the public by issuing a prospectus should be kept in a separate bank account and can be used only under certain conditions—either for allotment of securities or for refund of money in case of non-allotment, according to SEBI regulations. Failure to comply with these provisions will invite severe penalties, with a fine between five and fifty-five lakh rupees. Before proceeding with the process of delisting, it is important to first know about the role of the Securities and Exchange Board of India (SEBI)—India’s statutory regulator looking after the security market. Organized to ensure investor protection, SEBI oversees transparency, accountability, and equity in the financial market. The broad regulatory ambit of SEBI includes the management of stock exchanges, mutual funds, credit rating agencies, foreign investment, and insider trading, among others. By ongoing reform and regulatory monitoring, SEBI helps bring into shape a stable, efficient, and investor-friendly market system. Under this regulatory system, the process of delisting of securities—be it voluntary or mandatory—has surfaced as a pivotal area of concern, particularly about shareholder rights and market impact. Voluntary delisting is where the company can have its securities taken out of the exchange for reasons like strategy or operation, but compulsory delisting occurs at the direction of the stock exchange or SEBI owing to non-adherence or failure on other regulations.

Delisting of Securities

Delisting of Securities is the perpetual exclusion of a firm’s securities from a listed stock exchange so as to terminate their availability for trade on such a platform. Such a move may be carried out voluntarily by the firm or compelled compulsorily by the regulating bodies. Before a company issues a prospectus or sells its shares by an Offer for Sale, it is required to make an application to the relevant stock exchange in the form prescribed. But if the company decides to delist its securities from the exchange later on, or it does not follow the requirements as outlined in the listing agreement—like timely disclosure, minimum public shareholding, or corporate governance standards—delisting is unavoidable. The reason for delisting can vary from business restructuring and cost-cutting to low trade volumes and mergers or acquisitions. Whether voluntary or compulsory, delisting has significant implications for shareholders, affecting liquidity, transparency, and investor exit opportunities, thereby warranting scrutiny under SEBI’s regulatory framework.

CONDITIONS FOR DELISTING

The SEBI (Delisting of Equity Shares) Regulations, 2009 establishes the conditions and procedures that have to be adopted by a company if it intends to delist its shares from a stock exchange. Under these regulations, delisting of shares is not possible right after a buyback or preferential allotment—that is, issuing equity shares to choice investors. Similarly, delisting is not possible unless the company’s shares are listed on the stock exchange for three years at least.

Another significant condition is that if the company has issued convertible instruments (such as debentures or warrants that can be converted to shares), it cannot delist the same class of shares until such instruments are either converted or no longer outstanding.

SEBI also introduced new regulations in 2015 to avoid misuse. As per Regulation 4(1A), if any promoter or member of the promoter group has disposed of shares within six months prior to the board’s approval of the delisting proposal, they cannot proceed with the delisting. This is to prevent manipulation of share prices or unfair trade practices.

Besides, the promoters cannot use company money to repurchase shares at the time of delisting. They can use their money to offer an exit route to the shareholders. SEBI absolutely forbids fraudulent, deceptive, or manipulative practices during the delisting procedure to safeguard public investors’ interests.

TYPES OF DELISTING

• Voluntary Delisting

Voluntary delisting takes place when a company on its own decides to delist its equity shares from the stock exchange. Delisted, the firm’s shares will not be tradeable on that exchange anymore. This is typically a decision of the company promoters for some reason or another—like cutting down on the compliance cost, poor trading volumes, firm restructuring, financial losses, or because the firm is no longer functional.

To initiate the process, the company must obtain its board of directors’ approval and subsequently shareholders’ approval, generally by postal ballot. Delisting, as per SEBI rules, has to be approved by not less than two-thirds of the voting public shareholders.

A company can opt to delist from all the stock exchanges where its shares are listed, or from one or a few of them. If the shares continue to be listed on a stock exchange having nationwide terminals (such as BSE or NSE), then the company need not offer an exit option to shareholders. But if delisting would mean that the shares are not available for listing on any nationwide exchange, then the company has to make an offer of exit to public shareholders, enabling them to dispose of their shares at a fair price.

If an exit offer is not required, the company has to:

– Obtain a board resolution to delist,

– Issue a public notice regarding the decision, and

– File an application with the concerned stock exchange.

According to the SEBI (Delisting of Equity Shares) (Amendment) Regulations, 2015, prior to approval, the board of the company should also:

1. Notify the stock exchange that the promoters or acquirers have made a proposal to delist the shares.
2. Engage a SEBI-registered merchant banker to carry out due diligence, and give notice to the stock exchange.
3. Obtain and scrutinize trading records of the company’s shares held by the top 25 shareholders during the past two years.

• Compulsory Delisting

Compulsory delisting occurs when a stock exchange itself delists a company’s shares from trading. This normally occurs because the company has not adhered to significant rules and conditions specified in the listing agreement. These causes and procedures are defined under Section 21A of the Securities Contracts (Regulation) Act, 1956, and corresponding SEBI regulations.

A company can be compulsorily delisted due to a number of reasons, including:

– Non-compliance with disclosure obligations,

– Extended suspension of trading,

– Failing to keep the minimum public shareholding,

– Non-payment of listing charges,

– No business activity for a considerable time, or

– Engaging in fraud or deceitful conduct.

After a stock exchange determines to compulsorily delist a company, the following general procedure is adopted:

1. Notice to the Company: The stock exchange normally provides notice to the company regarding its non-compliance and provides an opportunity for it to respond.
2. Delisting Order: If the company continues not to be compliant, then the exchange can issue a formal delisting order.
3. Board of Directors Meeting (Optional for Compliance): In certain situations, particularly where compliance is being attempted, the Board of Directors of the company might convene a meeting in order to address the matter and suggest action. In severe compulsory delisting, though, this might not be necessary as the move is undertaken by the exchange.
4. Shareholder Meeting: If, however, the company wishes voluntarily to comply or to correct this situation, a General Meeting to approve a special resolution may be convened to require member approval.

In mandatory delisting, there is no exit option to be provided by the promoters to the public shareholders since the delisting is not being done voluntarily. SEBI regulations, however, protect the shareholders. The exchange can appoint an independent valuer to ascertain the fair value of the shares, and the promoters can be instructed to buy back the shares from the public shareholders at that value.

Forced delisting tends to erode investor confidence and symbolizes weak corporate governance or the poor financials of the firm. It also constrains the free movement of shareholders to trade or sell their shares, hence rendering this practice relevant from the regulatory and protection of investors perspective.

Comparative Analysis: Voluntary vs. Compulsory Delisting

Market Dynamics and Long-Term Implications

Here’s a refined and easy-to-understand version of the “Implications of Delisting” section for your research paper:

Implications of Delisting

Voluntary or compulsory delisting has severe consequences for the companies, shareholders, and the overall securities market. If a company delists its shares voluntarily, then it is required to adhere to the strict norms of SEBI. It involves providing a reasonable exit option to the public shareholders if the shares are no longer going to be listed on any stock exchange having nationwide trading terminals. The sponsors should also make sure they have sufficient funds for repurchasing shares from the owners at a reasonable cost.

On the contrary, delisting compulsorily has serious penal consequences. Upon compulsory delisting of a company, its promoters, whole-time directors, and any companies promoted by them are prohibited from raising capital from or getting listed in the capital market or listing equity shares for a period of ten years from the date of delisting. It acts as an effective deterrent and encourages accountability.

SEBI has identified issues in the existing delisting regime and is actively engaged in amending its Delisting Regulations. The aim is to find a balance: avoid manipulation and abuse of the delisting process while also streamlining the process for authentic cases of voluntary delisting. Some of the key reforms being considered are:

• Shortening the overall time frame for delisting (presently approximately 250 days),
• reducing the risk of price manipulation,
• Implementing trading suspensions after the announcement of delisting, and
• Ensuring a minimum threshold for buyback of public shareholding.

SEBI’s Discussion Paper on Review of Delisting Regulations highlights concerns from market participants, such as:

• Manipulation in the reverse book-building process, where promoters may collude with select shareholders to influence the price,
• Informal arrangements for predetermined delisting prices, and
• The overall time-consuming and uncertain nature of the current process often leads to failure or discourages companies from delisting.

These observations point to the necessity for reforms guarding investors, facilitating fair price discovery, and providing transparency enabling companies to delist due to valid business reasons.

Case Law

 Cadbury India Limited – Shareholder Resistance and Fair Valuation in Delisting

Cadbury India is a classic case that illustrates the intricacies of voluntary delisting and the paramount importance of fair valuation in safeguarding shareholder rights.

In 2003, Cadbury began the process of voluntary delisting by making an offer to shareholders of Rs. 500 per share to repurchase equity and reach the 90% level of delisting. Although Cadbury was able to purchase a large stake, 2.4% of shareholders, approximately 8,149 in number, declined to tender their shares, challenging the reasonableness of the offer price.

Key Developments:

-2009: Cadbury increased its offer to Rs. 1,340, which was once again rejected.

-2010: The Bombay High Court ordered Ernst & Young (E&Y) to fix a fair valuation, which was Rs. 1,743.

– 2011: Cadbury increased its offer to Rs. 1,900, but dissenting shareholders insisted on a Discounted Cash Flow (DCF) based valuation.

– July 2011: E&Y used the DCF method and valued the shares at Rs. 2,014, which was still less than the Rs. 2,500 demanded by shareholders.

– Albeit ongoing disagreement, most of the shareholders agreed to delist, with merely 2,784 of 7,51,120 non-controlling shareholders being against the move.

– The Bombay High Court eventually approved a capital reduction at Rs. 2,014.50 per share on the basis of E&Y’s updated valuation.

Significance:

This case highlights the significance of independent valuation and judicial intervention to make exit pricing fair. It also illustrates how shareholder activism can affect delisting procedures and prevent minority interests from being ignored.

International Perspective on Delisting Practices

Beyond India, international markets handle delisting differently:

• United States: The Securities and Exchange Commission (SEC) obliges companies to comply with ongoing listing requirements. Failure results in delisting, but shareholders are usually not deprived of rights through Over-The-Counter (OTC) trading mechanisms.
• United Kingdom: The London Stock Exchange requires a formal explanation for delisting, guaranteeing shareholders’ advance notice. A special resolution (75% vote) is also necessary.
• Singapore: The Singapore Exchange permits delisting if the shareholders agree and the exit offer is considered fair by an independent financial adviser. 

Recommendations

To have a fairer and more efficient delisting system, the following recommendations are made:

1. Consolidate the Reverse Book Building (RBB) Process SEBI must adopt stringent checks and surveillance mechanisms to deter manipulation during the RBB process. Checks such as bid transparency, restrictions on related parties’ participation, and independent validation will help revive investor confidence.
2. Make Mandatory Fair Exit Price in Compulsory Delisting Investors are left with no decent exit in compulsory delisting situations. Instituting a mandatory fair exit price as set by an independent valuer would serve to safeguard shareholder interests and align the two delisting processes.
3. Promote Investor Education and Grievance Redressal SEBI must conduct regular awareness programs about delisting procedures and rights. Time-bound complaints redressal and strengthening the grievance redressal systems can boost investor confidence.
4. Digital Delisting Process Transfer of delisting applications, disclosures, and communication with shareholders to a digital, centralized platform will improve transparency, decrease processing time, and avert delays or manipulations.

 Conclusion

Delisting mechanism under SEBI has moved forward gradually with the goal of protecting the interest of investors as well as implementing orderly exit methods. Nonetheless, there are noteworthy differences between compulsory and voluntary delisting, most notably with regard to investor protection and procedural equity.

While voluntary delisting offers structured mechanisms like exit opportunities and reverse book building, compulsory delisting often leaves investors disadvantaged. SEBI’s recent efforts to revisit and reform delisting regulations are commendable but must be comprehensive, ensuring that transparency, accountability, and investor trust remain at the forefront.

An equilibrated delisting regime—whose focus is on market integrity while acknowledging companies’ legitimate business needs—is critical to maintaining a sound, sustainable, and equitable capital market environment