SEBI refuses to grant STLL relaxations from Delisting Regulations
It was felt that the relaxations sought defeated the very purpose of Delisting Regulations to protect the rights of public shareholders and provide them a reasonable exit option
In a recent Order, the Securities and Exchange Board of India (SEBI) has found it inappropriate to grant the relaxations sought by the Company i.e. Sindhu Trade Links Limited(STLL/Applicant)from the applicability of Regulation11, Regulation 17(1), Regulation 19(1) and Regulation 20 of the SEBI (Delisting of Equity Shares) Regulations, 2009 (Delisting Regulations).
In the present matter, the SEBI had received an application from STLL seeking exemption / relaxation from Regulations 11, 17, 19 and 20 of the Delisting Regulations under Regulation 25A of the said Regulations. The Applicant had submitted that the volatile nature of the Company's share portrayed a very negative proposition to investors which in turn reduced the probability of expansion and investment by Private Equity investors.
The submissions included that Delisting was the only option available to them to attract new investment. The exemptions sought under the Application were purely in the interest of investors as all minority dissenting shareholders who wished to exit the Applicant Company would be offered an exit price in accordance with the Delisting Regulations. If exemption from strict enforcement of the Delisting Regulations was not granted, it would be harsh and prejudicial to the Company and its stakeholders.
According to G. Mahalingam, Whole Time Member (WTM), the variation in share prices of the Applicant in the recent past was not that unusual or exceptional so as to substantiate the exemptions sought in the Application. Inability to attract investment, is also not a convincing ground to consider granting exemption from major provisions of the Delisting Regulations.
The WTM also noted that as regards the exemptions sought by the Applicant from the requirement of opening an Escrow Account as provided under Regulation 11 of the Delisting Regulations and the requirement to open a special account to pay consideration as provided under Regulation 20(1), these requirements are critical to ensure that the promoters meet the commitment after the shareholders tender their shares in the exit offer.
A relaxation thereto may prejudice the successful completion of the offer and may cause losses to public shareholders participating in the delisting process. Inability of the promoters to arrange for funds, or affidavits submitted by a section of shareholders even prior to determination of the exit price, are not adequate reasons to even consider relaxation of such a critical requirement in the Delisting Regulations.
From an evaluation of the relaxations sought and presuming the bonafides underlying the affidavits of the public shareholders, it transpired that the idea of the promoters and the supporting shareholders was to seek investments from third- party investors and to continue together as shareholders.
The second reason cited in the application was the lack of frequency of trading in the scrip. While less frequency can be a reason for a Company to consider delisting itself, it cannot be done by way of an indirect circumvention of the basic requirements laid down in the Delisting Regulations.
The relaxations, if considered, would lead to a total distortion of the very object of the Delisting Regulations, which are aimed at protecting the rights of public shareholders and providing them a reasonable exit option.
The powers of relaxation available under the Delisting Regulations ought to be exercised to advance the interests of the investors in securities and the securities market. The application seems frivolous from the larger perspective of the investor community and so did not merit consideration.
The WTM also noted that the promoters of the Applicant wanted to provide an exit opportunity only to shareholders holding 2.13% shareholding. The Applicant had submitted affidavits from 31 public shareholders holding 22.90% shareholding, stating that they wanted the Company to be delisted but did not want to exit or participate in the delisting process.
The WTM was of the view that such undertakings obtained prior to the publication of the delisting offer price could not be relied upon. As such, the main purpose for which a public shareholder would invest in a Company is to obtain maximum return on his investment. Since the delisting offer price, which is to yet to be decided, is the primary factor that would determine the decision of the public shareholder with respect to exit, such undertakings obtained at a time when the offer / exit price was not made available to them, cannot be considered as an informed decision.
Consequently, a relaxation / exemption merely based on such undertakings and which would deprive shareholders holding 22.90% of the shareholding, an opportunity to participate in the delisting process, could not be considered.