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Companies may be allowed to delist via fixed price: Sebi Chief

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Mumbai: The Securities and Exchange Board of India (Sebi) is exploring the option of allowing companies to delist by announcing a fixed price for shares to be bought back in place of the existing reverse book building process, chairperson Madhabi Puri Buch said on Monday.

The regulator is also working on instantaneous settlement of stock market transactions and reviewing the trading plan mechanism for insiders at listed firms. Sebi will issue a discussion paper on the delisting process before December.

“Because of the way… it was formulated, and because of the 90% threshold, there is a possibility of misuse,” the Sebi chief told reporters on Monday. “Certain operators are specialists in delisting of shares, we know that. Their business model is, wherever there is an anticipation of delisting, go and garner 10% or more amongst their own like-minded people. And… when the delisting proposal comes, to extract a higher price. That need not always be the fair price.”

‘Positive Development’

Sebi is not the arbiter of what the fair price should be, she said.

“But if there is a certain price that has been in the market for a reasonable period of time (and) only because of delisting, the price is jacked up to a very high level, that may not be the fair price,” Buch said. “When we talk up about fairness, it should be fair for all the parties. Secondly, the power still rests with the investor. However, as a regulator, we cannot stand by if that power is misused and that is the protection we owe to the companies.”

The delisting regulation will be reviewed by a committee headed by Keki Mistry. The regulator said it has received feedback from the industry that the current reverse book building mechanism is problematic. Under this, shareholders are allowed to place bids at the price at which they are willing to sell their shares in the offer.

The regulator said companies can try to set a fixed price and if that doesn’t work, they can go for the reverse book building mechanism. And if that also fails, then they will be given more time, maybe two-three years, to delist.

The regulator expects the new proposal will go a long way toward helping companies that don’t want to be listed.

“The move to fixed price is a positive development and is in alignment with the practice in global markets,” said Mehul Savla, partner, RippleWave Equity Advisors. “The reverse book building process invariably led to a higher element of speculation as the price bidding and acceptance or rejection process could result in a dramatic gain or loss depending on the outcome.”

The technical nature of the mechanism may hinder wider participation by investors.

“The complexity of delisting has been a major deterrent to M&A activity in listed companies,” Savla said. “Historically, slump sale structures have been pursued to overcome this which led to minority investors’ interest getting compromised. A simpler framework would promote higher level of M&A and lead to further development of financial markets.”

Separately, Sebi is considering a review of the rules for corporate disclosures related to insider trading regulations.

“We have a mechanism called the trading plan — the data shows that this has not worked well,” said Sebi whole-time member Ananth Narayan. Under this framework, “an insider can adopt a trading plan and therefore not be subjected to the requirement of insider trading. The feedback that we are getting is that this trading plan is fairly onerous.”

The regulator has set up a committee of market experts and will be coming out with a consultation paper on this by August end, Narayan said.

“Sebi’s endeavours to curb illicit activities are commendable,” said Sumit Agrawal, founder, Regstreet Law and former Sebi officer. “However, it is crucial to strike a balance that fosters genuine investment while mitigating undue burdens on market participants.”

The regulator is also working on a mechanism for instant settlement of trades in the stock market (T+0).

In January, in a global first, India moved to a T+1 settlement cycle — one day after the trade. Internationally, most developed markets function on a T+2 settlement cycle.

“Certainly, one of the things that we think is not very far off is the instantaneous settlement on the stock exchange,” Buch said. “We are working on that, we are engaged with the ecosystem and we believe that in the near future, we will have a mechanism which will facilitate instantaneous settlement of transactions on stock exchange.”

India is the first major economy that moved to T+1 settlement for all its scrips and this is something that is considered really pathbreaking, she said.

“Many of the jurisdictions conveyed that they were facing significant challenges both in terms of technology, processes to move into the T+1 settlement,” Buch said. “But the immediate impact on a conservative basis is that almost Rs 10,000 crore of margin has been released back into the system.”

Sebi is also planning a new regulatory design, which will see more participation from the industry on implementation challenges.

“This is an architectural shift that we wish to experiment with in Sebi,” Buch said, adding that letters have been sent to participants including industry lobbies CII, Ficci and Assocham as well as professional grouping ICAI among others.

“On deeper reflection, we have come to the conclusion that what we are dealing with is standard setting for implementation. This is not about the regulation but about execution or implementation of the regulation,” she said. “This task is best done by the industry bodies themselves. Our regulations will take us to a certain stage of expressing the regulatory intent on what is to be done but a lot of the ease-of-doing business lies in how it is to be done.”