The market regulator’s new proposals on delisting may spur M&A activity.

There could be increased M&A activity in listed companies, with a long-term view to delist in a few years. Or existing promoters may take the companies private, hoping to invite investment or sell the company at a higher value.

“The new fixed price delisting regime is certain to boost public M&A deal activity,” said Abhishek Dadoo, Partner, Khaitan & Co. “Financial sponsors and private equity funds might prefer buying a well-governed listed company and then take it private.”

The option of a fixed price offer is likely to eliminate subjectivity for public shareholders and acquirers, said experts.

“This will prevent a certain class of shareholders from hijacking the delisting process,” said Harish Kumar, Partner, Luthra and Luthra Law Offices India. “Shareholders can decide upfront whether to participate in the delisting process or not at the given price. This could also benefit an acquirer in arranging funds as the exit offer will be known well in advance.”

Will it work?

With the fixed price offer, public shareholders are left with a binary ‘yes or no’ option -- if they find the price attractive enough, they tender their shares and the delisting succeeds; else they refrain from tendering and the delisting fails.

“There can be a situation where the companies offer a 15 per cent premium only and there are no takers in the market,” said Kumar. However, there is no bar on the acquirer to offer a higher premium if the acquirer deems it commercially fit, he said.

“Under the fixed price regime, the guessing game around price discovery and the likelihood of deal failure is substantially reduced. A minimum premium of 15 per cent over the regulatory floor is a helpful guide which appears to set realistic price expectations for public shareholders,” added Dadoo.

Counter-offers

The threshold for making a counter-offer via reverse book building has been reduced from 90 per cent to 75 per cent, and has been linked to the volume weighted average price of the shares tendered and the delisting indicative price (if offered).

“There were cases where majority of public shareholders would have tendered their shares but the 90 per cent threshold was not met. This will allow the acquirer to have another shot at delisting instead of waiting for another six months,” said Manendra Singh, Partner, Economic Laws Practice.

Holding cos

The alternative framework for delisting of investment holding companies (IHCs) through a scheme of arrangement via selective capital reduction would give a fair exit price to public shareholders, said experts.

IHCs typically hold investments in shares or assets and do not have any active business operations because of which their shares tend to trade at a discount to their underlying.

Since IHCs have complex investments, floor price determination and RBB process will not fetch the ideal result, said Singh.

“By directly passing on underlying equity shares and cash equivalent for other assets, such scheme linked delisting process is likely to be seen as a viable option,” said Dadoo.

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