SEBI and the exchanges are making a mess of the compulsory delisting process. This another reason investors are put off
In the past few months, Moneylife has exposed how investors are being driven away from the capital market because of thoughtless policies that damage their interest. Cumbersome broker account-opening procedures, stealthily obtained and one-sided Powers of Attorney, shockingly skewed arbitration proceedings, almost non-existent grievance redressal system and over-priced initial public offerings (IPOs) that lead to losses are some issues that have caused India’s investor population to shrink from 20 million (SEBI survey) in 1992, when India embarked on liberalisation, to just eight million in 2009 (Swarup Committee Report).
Compulsory delisting of shares by stock exchanges is another issue that is turning off investors from the capital market. Consider this. An investor decides to invest in an IPO or an already-listed scrip and incurs the cost of opening a depository account (DP) to hold his shares and looks forward to benefiting from dividends and capital appreciation. Instead, after a burst of speculation and hectic trading, the share price begins to slide and soon there is no trading in the stock at all. There is also little information about the company’s activities. However, he continues to pay annual depository charges for holding the shares in dematerialised form.
A couple of years later, the shares are suspended for non-compliance with the listing agreement (usually failure to redress investor grievances or pay exchange fees) and remain in this state for years. He desperately writes to the company and the exchange, but has no assurance about whether trading will ever be re-started. Instead, he learns that the company may be ‘compulsorily delisted’. Now, there is another dilemma. While his investment has turned almost worthless, he continues to pay depository fees for holding on to the shares. Since the company is not wound up or liquidated, he cannot even recover a part of his investment. What should the investor do? Should he keep paying demat charges or write off the investment? Or, pay to have them re-materialised in the hope that they would be traded again? Until the 1990s, people used to hold on to physical share certificates, but now there is a cost attached even to holding worthless shares in dematerialised form.
Investor associations and market intermediaries have been pushing for stock exchanges to be more proactive to ensure that companies remain listed. Their pressure has prevented stock exchanges from delisting companies since 2004, but over 1,500 companies have remained suspended from trading—some from way back since the 1990s. In April this year, the Delhi Stock Exchange issued a notice to delist 150 companies, but it hasn’t acted on it as yet.
On paper, the consequences of compulsory delisting are serious. The company, its promoters and whole-time directors cannot, directly or indirectly, access the capital market, i.e., cannot re-list/list/come out with a public issue to list other equity shares for a period of 10 years. The exchange can also file prosecution or a winding-up petition. Companies that are compulsorily delisted also have to pay shareholders an exit price that is decided by independent valuers, chosen from a panel appointed by the exchange. Finally, a committee that includes an investor representative is supposed to make the decision to delist. However, the disinterest of stock exchanges in ensuring compliance has given companies a handy escape route to ignore investors and avoid stringent compliance and disclosure rules after having raised substantial funds through a hyped-up IPO.
Under the SEBI (Delisting of Equity Shares) Regulation of 2009, stock exchanges have to take ‘all reasonable steps to trace the promoters of the company’, but this happens rarely. Under pressure from investor associations, the Securities and Exchange Board of India (SEBI) has set up a committee to examine the problem of companies that are forever in suspended animation. In April this year, it was decided that stock exchanges would issue notices to suspended companies that have yet to redress investor grievances. According to Virendra Jain, Midas Touch Investor Association, of the nearly 1,600 companies that are suspended from trading, nearly 800 are regular with their filings with the Registrar of Companies; 500 of these do not have any pending investor complaints. It was decided that penal action would be initiated against such companies if they failed to redress issues in three months. It is unclear if there has been any progress on this.
The committee also wanted stock exchanges to be more active in regulating listed firms, with a clear process for monitoring compliance, issuing notices and invoking suspension and initiating penal proceedings, including the compulsory delisting mechanism of appointing valuers and providing investors an exit. There has been little action on this as well. Interestingly, the rules covering voluntary delisting of shares, which corporate India is lobbying hard to change, are far more robust. They require companies to appoint an investment banker to handle the delisting process. Companies also have to deposit the money required for acquiring shares (floor price multiplied by outstanding shares) in an escrow account.
The recently released Takeover Committee report, if accepted, will again allow automatic delisting of shares as a part of the open offer process following an acquisition. The proposed regulations require an acquirer to buy 100% of the outstanding shares and delist the shares at the same time. The Committee, headed by C Achuthan, has proposed that if the acquired shares cross the delisting threshold, then investors who have not tendered their shares in the open offer will only have an exit window in which to sell their shares to the acquirer. This is unfair from the investors’ perspective. We certainly do not need to find new ways to permit companies, which have raised public money at the best possible price, to vanish from the listed space.
Media reports, however, suggest that SEBI may not accept the recommendation that the open offer should cover 100% of outstanding equity (which will create an opportunity for automatic delisting) but may restrict it to 75% of the shares. Even otherwise, under the present rules, if the open offer causes the public holding to fall below the minimum public holding required under the listing agreement, the acquirer has to ensure compliance within a specified timeframe and cannot delist the shares. SEBI must restrict the open offer to 75% and ensure that automatic delisting is not allowed. It must also ensure that the new takeover rules do not subsume the voluntary delisting rules which have worked well and give public shareholders a say in deciding the exit price.
In the interest of attracting more investors to the stock market, SEBI needs to ensure that companies do not use IPOs as a one-time, fund-raising exercise with a plan to avoid accountability and compliance through the best available delisting opportunity. — Sucheta Dalal