‘… this isn’t Hotel California’ (or India’s New Fixed Offer Price Mechanism for Taking Public Companies Private)

The Securities and Exchange Board of India has decided to simplify the process of taking public companies private in India by permitting fixed-price delisting offers as an alternative to the existing requirement of determining the delisting offer price through a reverse book building method.

“Why should we say that once you are listed you can never leave… this isn’t Hotel California,” said the chairperson of the Securities and Exchange Board of India (SEBI), Madhabi Puri Buch, speaking at a press conference following SEBI’s board meeting on 27 June 2024. “This is a rich, vibrant market. We welcome people, but if for some reason they need to exit, they must be able to,” she added.

SEBI’s latest move is a welcome change, as delisting offers in India have had mixed results in recent years. This is expected to significantly simplify the take private process and boost public mergers and acquisitions activity.

EXISTING REVERSE BOOK BUILDING METHOD

This existing method of determining the offer price in a delisting offer called the “reverse book-building method” involves inviting public shareholders to bid on the sale price for their shares. The delisting offer price would be the price at which at least 90% of the total issued shares can be acquired, based on the sale prices indicated in such bids.

However, this has frequently resulted in a complex and uncertain delisting process with delisting offer prices that included a very high premium. Certain delisting processes have also seen market manipulation by significant shareholders, including hoarding of shares to influence the exit price. These factors have complicated the take private process in India, frequently resulting in failed delisting offers.

PROPOSED FIXED PRICE METHOD

SEBI has now decided to permit an offeror, whose shares are frequently traded, to fix up front the delisting price it proposes to offer (as an alternative to a price determined by the reverse book building method). An offeror can now use either method.

The fixed price should be determined as follows:

• It should include at least a 15% premium to the “floor price” prescribed under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, as amended (Takeover Regulations).
• The “floor price” under the Takeover Regulations is the highest price among various benchmarks, including (1) the volume weighted average market price of the shares in the preceding 60 trading days, and (2) the volume weighted average price paid by the acquirer or persons acting in concert for the shares in the preceding 52 weeks.
• In addition to the above benchmarks, SEBI has now included an additional benchmark—being the adjusted book value of the shares as certified by an independent registered valuer.

As before, a delisting offer will succeed if (1) the acquiror is able to acquire at least 90% of the total issued shares, and (2) more than 75% of the shareholders, including approximately 66.66% of the public shareholders approve.

IMPACT

Several international companies with large stakes in their Indian listed subsidiaries are likely to take advantage of this simplified delisting process to take such subsidiaries private. Delisting such subsidiaries will provide immediate advantages, such as avoiding extensive public disclosure requirements for a range of events and avoiding public shareholder approval requirements for several matters, including related party transactions.

This article is prepared for the general information of interested persons. It is not comprehensive in nature and should not be regarded as legal advice. We are not permitted to advise on the laws of India, and should such advice be required, we would work alongside an Indian law firm.