Open Offer + Delisting: SEBI's Attractive Combo For Deal Makers

In a major relief for investors, SEBI eases delistings preceded by open offers.

<div class="paragraphs"><p>Photographer: Noriko Hayashi/Bloomberg</p></div>
Photographer: Noriko Hayashi/Bloomberg

The market regulator has cleared a key hurdle for acquirers keen to take listed companies private by amending its takeover regulations to allow for open offers and delisting to be presented as a combination offer to shareholders.

The issue was first articulated by the Securities and Exchange Board of India’s primary market advisory committee in June this year.

Acquisition of 25% or more voting rights in a listed company triggers an open offer for another 26% from public shareholders, under SEBI's Takeover Regulations. When a transaction involves acquisition of more than 49%, it's likely that the maximum non-public shareholding threshold of 75% will get breached. For instance, assume via a transaction agreement, an investor acquires 64%. A minimum 26% public offer will take this acquirer to 90%.

At this stage, two contradictory SEBI regulations come into play for acquirers who intend to delist the company:

  • The acquirer has to reduce its holding to below 75% within 12 months as per the minimum 25% public shareholding norm.

  • If the investor intends to delist, it has first to scale down to 75%. That's because the regulations bar delisting until the minimum public float of 25% is met. Only then can the acquirer launch a delisting offer.

SEBI has now addressed this problem.

Two-In-One Offer 

Currently, the takeover regulations state that if an acquirer intends to delist the company after an open-offer triggering transaction, it must be disclosed so upfront. The delisting price will have to be determined via the reverse book-building process. If the delisting is successful, shareholders are provided an exit at the delisting price. If the delisting offer fails—acquirer fails to reach 90%—the open offer obligations must be fulfilled.

And then follows the commercial difficulty of bringing the shareholding back to 75% to comply with the minimum public shareholding norm.

To address this, SEBI has now eased this process to say-

When The Acquirer Intends To Delist...

  • State upfront the intention to delist.

  • Indicate open offer price as per takeover regulations. And an indicative delisting price which should include a suitable premium. The acquirer has to give the rationale and justification for the indicative price, which can be revised upwards before the tendering period. Indicative price cannot be less than book value of the company.

  • If delisting is successful, shareholders will have to be paid the indicative price. If not, shareholders who tender their shares shall be paid the open offer price.

  • In this process, if the acquirer crosses the threshold of 75%, another attempt of delisting can be made within 12 months. The second attempt, to be made as per Delisting Regulations, will be successful if 90% threshold is met and 51% of the residual public shareholding is acquired.

To be clear, this process will be available only to new acquirers and not existing promoters, entities associated with them or a person already holding more than 25% shares or voting rights. The incoming investor is barred from acquiring joint control with any of these entities.

SEBI has provided new acquirers a very viable option to take the company private, Akila Agrawal, partner at Cyril Amarchand Mangaldas, said. New acquirers can now offer an indicative fixed price, at a premium to the floor price, and are no longer subject to price discovery via the reverse book building process, she said.

If the acquirer reaches delisting threshold, then the offer is successful and it pays the indicative fixed price. If not, it pays the standard open offer price and completes the offer formalities. This has crunched the timeline as the offers are no longer sequential. It also avoids the acquirer having to pay interest on the open offer price if the delisting is not successful.
Akila Agrawal, Partner, Cyril Amarchand Mangaldas

The second big relief for such new acquirers is that if they end up in excess of 75%, they get another shot at delisting—albeit through reverse book building—in the next 12-month period, Agrawal said.

When the Acquirer Doesn’t Want to Delist...

Here too, there’s some relief.

If post the open-offer triggering transaction and the shares tendered by the public shareholders, an acquirer breaches the MPS threshold of 75%, the acquisition can be proportionately reduced, the regulator has said.

This is a welcome proposal—an incoming acquirer can reduce the acquisition under the triggering agreement, whether primary or secondary, and the open offer proportionately to stay within the minimum public shareholding threshold, Ashwath Rau, partner at AZB & Partners, said.

Suppose there’s a triggering transaction of 60%. And then you have to make a tender offer for 26%. That would take the acquirer to 86%. SEBI is now saying to not breach the MPS limit, the acquirer can reduce the 11% pro rata from the triggering transaction and the open offer.
Ashwath Rau, Partner, AZB & Partners

So far, acquirers had to buy whatever was tendered by the public shareholders and in many cases, acquirers ended up with 75%+ shareholding, Rau explained. Then to meet the MPS threshold, you get one year, which is theoretically nice but commercially it can become quite challenging. "Now, you can actually design the acquisition is such a way that you stay below 75%."