SEBI Notifies Regulations on the Delisting of Equity Shares - International Law Office

International Law Office

Capital Markets - India

SEBI Notifies Regulations on the Delisting of Equity Shares

September 29 2009

Introduction
Applicability
Circumstances in which Delisting is not Permissible
Types of Delisting
Rights of Public Shareholders


Introduction

The Securities and Exchange Board of India (SEBI) recently notified new regulations on the delisting of listed company equity shares with effect from June 10 2009. These regulations replace the SEBI (Delisting of Securities) Guidelines 2003 as far as the delisting of equity shares is concerned. However, the new regulations are limited to equity shares; the 2003 guidelines will still apply to the delisting of other listed securities that are not equity shares.

Together with providing greater clarity on the procedures involved in the delisting of equity shares, the regulations also introduce more stringent requirements for the voluntary delisting of equity shares, making this process more difficult for company promoters.

Applicability

The regulations apply to the delisting of a company's equity shares from all or any recognized stock exchange on which such shares are listed. However, the regulations do not apply to any delisting made pursuant to a scheme sanctioned by the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act 1985, or by the National Company Law Tribunal if such scheme lays down any specific procedure to complete the delisting or provides an exit option to existing public shareholders at a specified rate.

Circumstances in which Delisting is not Permissible

Companies cannot apply to a recognized stock exchange for the delisting of equity shares and no recognized stock exchange will permit the delisting of a company's equity shares in the following circumstances:

  • if the delisting is pursuant to a buyback of equity shares by the company;
  • if the delisting is pursuant to a preferential allotment made by the company;
  • if three years have not elapsed since the listing of that class of equity shares on a recognized stock exchange;
  • if any instruments issued by the company which are convertible into the same class of equity share that is sought to be delisted are outstanding; or
  • if the securities are convertible.

Types of Delisting

Voluntary delisting
A company may delist its equity shares from all recognized stock exchanges on which they are listed or from the only recognized stock exchange on which they are listed. However, prior to making an application for delisting, all public shareholders holding equity shares of the class that is sought to be delisted must be given an exit opportunity.

'Public shareholders' for the purpose of these regulations are the holders of equity shares other than promoters, holders of depositary receipts issued overseas against equity shares held with a custodian and such custodian.

A company may delist its equity shares from one or more recognized stock exchange on which they are listed and continue their listing on one or more other recognized stock exchange, subject to the provisions of these regulations. If after the proposed delisting from one or more recognized stock exchange the equity shares would remain listed on a recognized stock exchange that has nationwide trading terminals, no exit opportunity need be given to the public shareholders. However, if after the proposed delisting the equity shares would not remain listed on a recognized stock exchange that has nationwide trading terminals, all public shareholders of the equity shares sought to be delisted must be given an exit opportunity.

Recognized stock exchanges that have nationwide trading terminals include the Bombay Stock Exchange Limited, the National Stock Exchange of India Limited and any other recognized stock exchange which may be specified by SEBI in this regard.

Compulsory delisting
A recognized stock exchange may, by order, delist a company's equity shares on any ground prescribed in the rules under Section 21A of the Securities Contracts (Regulation) Act 1956, provided that no order is made without the company concerned being given a reasonable opportunity of being heard. The decision regarding compulsory delisting will be taken by a panel constituted by the recognized stock exchange consisting of:

  • two directors of the recognized stock exchange (one of whom will be a public representative);
  • a representative of the investors;
  • a representative of the Ministry of Corporate Affairs or the registrar of companies; and
  • the executive director or secretary of the recognized stock exchange.

Before making an order, the recognized stock exchange must give notice of the proposed delisting in one English national daily with wide circulation and one regional language newspaper of the region where the concerned recognized stock exchange is located. The notice must stipulate a period of no less than 15 working days from the notice within which representations may be made to the recognized stock exchange by any person that may be aggrieved by the proposed delisting. The recognized stock exchange must also display such notice on its trading systems and website.

After passing an order, the recognized stock exchange must publish notice of the delisting in one English national daily with wide circulation and one regional language newspaper of the region where the concerned recognized stock exchange is located. The notice must disclose:

  • the company's name and address;
  • the determined fair value of the delisted equity shares; and
  • the names and addresses of the promoters of the company which would be liable.

The notice will also inform all other stock exchanges of where the company's equity shares are listed and the circumstances surrounding the delisting.

A recognized stock exchange may delist a company's securities on the following grounds:

  • the company has incurred losses for the last three consecutive years and has negative net worth;
  • trading in the company's securities has remained suspended for a period of more than six months;
  • the company's securities have been infrequently traded for the last three years;
  • the company or any of its promoters or director has been convicted for failure to comply with any of the provisions of the SEBI Act 1992, the Securities Contract Regulation Act, the Depositories Act 1996 or any rules, regulations or agreements made thereunder, and has been fined no less than Rs10 million or has been imprisoned for three or more years;
  • the addresses of the company or any of its promoters or directors are not known, false addresses have been furnished or the company has changed its registered office in contravention of the provisions of the Companies Act 1956; or
  • the company's public shareholding has fallen below the minimum level applicable to the company according to the listing agreement under the Companies Act and the company has failed to raise public holding to the required level within the time specified by the recognized stock exchange.

Rights of Public Shareholders

Where a company's equity shares are delisted by a recognized stock exchange, the recognized stock exchange will appoint an independent valuer or valuers to determine the fair value of the delisted equity shares. The recognized stock exchange will form a panel of expert valuers from which the valuer or valuers will be appointed. The company promoter will acquire the delisted equity shares from the public shareholders by paying them the value determined by the valuer, subject to the option of retaining their shares.

Where a company has been compulsorily delisted, the company, its full-time directors, its promoters and any companies promoted by them may not directly or indirectly access the securities market or seek listing for any equity shares for a period of 10 years from the date of such delisting.

Delisting by operation of law
In case of winding-up proceedings of a company whose equity shares are listed on a recognized stock exchange, the rights, if any, of the company's shareholders will be in accordance with the laws applicable to those proceedings. Where SEBI has withdrawn the recognition granted to a stock exchange or refused it renewal of recognition, in the interests of investors the board may pass an appropriate order regarding the status of the equity shares of companies listed on that exchange.

For further information on this topic please contact Manoj K Singh at Singh & Associates by telephone (+91 11 4666 5000), fax (+91 11 4666 5001) or email (manoj@singhassociates.in).


Comment or question for author

ILO provides online commentaries as specialist Legal Newsletters. Written in collaboration with over 500 of the world's leading experts and covering more than 100 jurisdictions, it delivers individually requested information via email to an influential global audience of law firm partners and international corporate counsel. Please click here to register for the service.

The materials contained on this website are for general information purposes only and are subject to the disclaimer.

ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription. Register at www.iloinfo.com.