To further tighten the Code, SEBI has mandated that if a promoter plans to buy out equity in a bid to delist the company, it must use the reverse book-building process that will permit the shareholders (institutional and retail) discover the exit price. This will stop promoters using a bearish market to shore up their equity from 75 per cent to 90 per cent using market-linked prices.

Promoters cannot use either the creeping acquisition route through market purchases (at 5 per cent every year) or preferential allotments to shore up their stake. This is a shareholder-friendly move.

Unfinished larger issue

As SEBI goes about changing the Listing Agreement of the Stock Exchanges to bring it in line with the Takeover Code, two problems are likely to crop up:

First, even assuming that the stock exchanges (on instructions from SEBI) bring down the minimum public shareholding norm to a uniform 25 per cent, regardless of the year of listing, they will be faced with one key issue.

Once 25 per cent becomes the public shareholding threshold, all companies — both multinational and Indian — that have equity above 75 per cent will have only two options. They can either delist their stock through the reverse book-built process or raise their level of public shareholding to 25 per cent by issuing new shares, disinvesting through an offer for sale or selling holdings through the stock exchange.

In the S&P CNX 500 Index, about 20 companies, including some prominent MNCs such as Gillette India, 3M India and Honeywell Automation, and Indian companies, such as Wipro, iGate Global, Sundaram Clayton and Dabur will fall under this above-75 per cent category.

Though the SEBI Chairman has stated that companies will get sufficient time to conform with the new requirements, infusion of equity, even in a staggered fashion can affect the market capitalisation of companies in a big way.

Two, large companies such as Tata Consultancy Services or Bharti Tele-Ventures have managed to stick to a public float of about 10 per cent using the exemption provided under Rule 19 (2)(b) of the Securities Contract (Regulation) Rules, subject to some conditions.

Now, the onus will be on SEBI to continue with this largesse without forcing the companies to resort to dilution of shareholding up to 25 per cent. But if these companies are exempted from the public shareholding norm, it is likely that other corporates will object to differential treatment on this score. SEBI will have to obviously tread with care as it makes changes in the Listing Agreement.

Tightening the delisting norm

The higher public shareholding norm of 25 per cent along with the reverse book-built process is likely to favour retail shareholders in a big way. At a higher level of 25 per cent, instead of the 10 per cent prescribed earlier, there is a better chance of fair and rational price discovery as participation in this process will generally be from a mix of institutional and savvy retail shareholders. Take, for instance, the delisting offers made by the promoters of e-Serve International in August 2004 or Digital GlobalSoft in February 2004. In both the instances, nearly 50 per cent of the equity stake was put on the block for delisting.

The combined participation of the institutional/retail shareholders helped fix the final offer price at a handsome premium to the floor price and the offers sailed through.

Contrast this to the offers made by Astra Zeneca or Vickers Systems International in July/August 2004. In both the cases, the promoters held over 90 per cent of the equity and less than 10 per cent was put up for delisting. In Astra Zeneca's case, compared to a floor price of Rs 825, the shareholders demanded a hefty Rs 3,000, which led to the promoters rejecting the offer. Ditto for Vickers Systems International.

Clearly, when the outstanding equity shrinks to a low (say, 10 per cent or below), irrational pricing expectations are quite common. Though, at times, in illiquid stocks, shareholders also get a raw deal.

While raising the minimum public shareholding level to 25 per cent is welcome, SEBI will have to ensure that additional protection is available to the shareholders under the Delisting Guidelines.

In the interest of shareholders, SEBI should amend the Guidelines to stipulate that the reverse book-built process will go through only if the promoter is able to mop up, say, 50-60 per cent of the 25 per cent outstanding equity (say, up to 15 per cent).

Unless this is specified, promoters may be able to delist the stock, beyond 75 per cent, by mopping up a mere 3-5 per cent holding. By imposing a 15 per cent requirement, the amendment to the Delisting Guidelines will also bring it in consonance with 90 per cent shareholding prescribed earlier under the Takeover Code.

Open-offer trigger

SEBI has also made the right move by restricting any acquisition of shares beyond 55 per cent but less than 75 per cent only through an open offer under the Takeover Code. The decision to specifically prohibit acquisitions through the creeping acquisition route or preferential allotments is a well-reasoned and welcome change.

After all, the September 2004 study under SEBI's auspices recommended that creeping acquisition should not be allowed up to 75 per cent of the equity. Primarily because promoters acquire management control with a 51 per cent equity stake and there is little threat of takeover beyond this level.

So far, allowing creeping acquisition up to 75 per cent has only ensured a significant reduction of liquidity in the market and a diminution of the role of the retail shareholders. Even the spate of preferential allotments followed a similar logic till recently. This change is likely to favour a good proportion of shareholders in listed companies. In the S&P CNX 500 alone, in about 150 companies promoters have equity stake above 55 per cent.

The only reservation is that there appears to be no logic for fixing the open offer threshold at 55 per cent, except for a 20 per cent offer taking the equity stake to 75 per cent. Instead, this threshold should have been reduced to 51 per cent, as promoters in listed companies can always make an open offer for any level above 20 per cent.

Had this been reduced to 51 per cent, an additional 60 companies in the S&P CNX 500 would have come within the open-offer threshold. It is likely that quite of a few of these companies will enhance their stake using the creeping acquisition route to 55 per cent in the near future.

Though creeping acquisition and preferential allotment have been specifically prohibited, buyback (either through the tender route or open market purchases) has not been mentioned. Obviously, it remains to be seen whether changes will be made to the buyback regulations to stop the increase in equity stake by promoters.

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