Primary Market - Public Issues - Delisting of Securities

‘Delisting’ denotes removal of the listing of the securities of a listed company from the Stock Exchange. Delisting differs from suspension or withdrawal of admission to dealings of listed securities which is for a limited period. Broadly, delisting of securities may be of two types, namely, voluntary delisting and compulsory delisting. In the case of voluntary delisting, a listed company seeks of its own motion delisting of its securities; while in the case of compulsory delisting, a listed company is compelled by the Stock Exchange to delist its securities.

Whereas listing of securities is governed by statutory provisions, rules, regulations, guidelines, etc., curiously, law is conspicuously silent on the delisting of securities. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, vide Regulation 21(3)(a) refers to delisting in circumstances mentioned therein. The Companies Act in its section 73, provides for listing of shares and debentures on recognised Stock Exchanges. However, it does not contain any provision on delisting of securities. Unlike suspension or withdrawal of admission to dealings in the listed securities, neither the SCR Act nor the SCR Rules provide for anything in regard to delisting of securities.

List of securities with the stock exchange is governed by the terms of Listing Agreement. Listing Agreement is an agreement between two parties to it. It may be terminated by mutual consent of the two parties. It cannot be terminated unilaterally by one of the parties to it, unless there is a breach of any of the provisions of the agreement on the part of the other party and the first-mentioned party terminates it by the process of law.

The listing agreement deals with this situation through the following two clauses incorporated therei.

1. "........... the company hereby agrees and declares that any of its securities listed on the Exchange shall remain on the list entirely at the pleasure of the Exchange and that nothing herein contained shall restrict or be deemed to restrict the right of the Exchange to suspend or remove from the list the said securities at any time and for any reason the Exchange considers it proper in its absolute discretion."

2. ".......... unless the Exchange agrees otherwise the company will not without the previous permission in writing of the Central Government withdraw its adherence to this agreement for listing of its securities."

While the stock exchange has an overriding power to delist securities, the stock exchange is an intermediary and self regulating authority. Its principal objecting in terms of listing contracts entered with Issuers is to safeguard and protect the interests of the Investors (shareholders of the company). Tacitly thew parties involved in deciding delisting of a company are the company and its shareholders. It is worth noting that subscribers to the securities in a public issue subscribe on the faith of the prospectus which inter alia promises to the world that the securities of the company would be listed on the Stock Exchange/s named therein. This is the tenor of section 73 of the Companies Act, which enjoins upon a company intending to offer its securities to the public by prospectus, to state the name of the Stock Exchange or as the case may be, each such Stock Exchange, on which it is proposed to list the securities so offered. As such, delisting of the securities is a breach of that promise.

The stock exchange has therefore to keep the interests of the3 shareholders in the forefront while considering delisting a company either under the compulsory or voluntary routes

Some of the common causes for compulsory delisting of securities are:

1. Non-payment of listing fees.

2. Non-compliance with listing requirements.

3. Non-compliance with provisions of the Listing Agreement.

4. Absence of trading or negligible trading.

5. Non-redressal of investors’ complaints despite repeated reminders.

6. Unfair trading practices at the behest of the promoters / management.

7. Other malpractices such as fake original or duplicate or share certificates deliberately issued by the management.

8. Whereabouts of the company and / or its promoters / directors not known.

9. Reduction in the number of public holders of securities.

Some of the common causes for voluntary delisting of securities are :

1. A listed company finds the listing fees payable to the Stock Exchange burdensome and disproportionate to the benefits accruing to the company and/or its security holders.

2. The number of public holders of the listed securities is reduced to so low a level (due to private placement issue or otherwise) that it does not justify the securities to continue to be listed.

3. Regional imbalance of the holders of the securities either due to shifting of the companies registered office and / or location of manufacturing unit, or for any other reason.

4. Negligible trading or total absence of trading for a considerably long period of time.

5. The company has either suspended its business or is under closure or has become a sick industrial company.

6. Small capital base or failure to comply with the requirement of increasing the capital, not justifying listing to be continued.

7. Mergers, demergers, amalgamations, takeovers, etc.

Securities and Exchange Board of India (SEBI) on February 19, 1997, appointed a committee under the Chairmanship of Dr. K R Chandratre, immediate past President of the Institute of Company Secretaries of India to look into and make recommendations to SEBI on various aspects concerning delisting of securities of companies listed on the recognised stock exchanges

The terms of reference of the Committee were as follows:

1. to examine the present conditions for the delisting of securities of companies listed on the recognised stock exchanges and suggest norms and procedure in connection therewith;

2. to examine ways and means of ensuring continuous listing of the securities and protection of the interests of the investors;

3. to review mode of payment of listing fees payable by companies to the stock exchanges and suggest manner and periodicity of payment of the fees;

4. to recommend changes in laws, rules, regulations, etc. in order to give effect to the recommendations on the above mentioned matters

The Committee was constituted with wide representation from the Stock Exchanges, Investors’ Associations, Corporate sector, SEBI and the Central Government (Department of Company Affairs). The Committee held five meetings and deliberated extensively on all the aspects of listing and delisting of securities in light of the provisions of the Companies Act, the SCR Act, the SCR Rules and the Rules, Regulations, and Bye-laws of the Stock Exchanges, the Listing Agreement, the laws and practices prevailing in other countries as well as the issues that have arisen before the Central Government, SEBI and Stock Exchanges in the course of administration of the Stock Exchanges over time.

The Committee submitted its report to SEBI with comprehensive recommendations on 10th December, 1997.

Based on the recommendations of the Committee SEBI advised guidelines for delisting vide its Circular No. SMD/POLICY/CIR-14/98 dated April 29, 1998. The guidelines were in force until the end of year 2002.

In the following years there was a growing trend of delisting of shares from the Indian stock exchanges. The Multi-National Companies (MNCs) have also been seeking delisting from the stock exchanges for a variety of reasons and according to the statistics and indications available with the Committee, the number of such companies has been on the increase in the last two years and this trend is likely to continue. The trend has engaged the attention of the public, media and investor associations and has caused uneasiness and anxiety among investors. In several quarters, a view has also been expressed that delisting should not be resorted to. The Ministry of Finance (MOF) have also written to SEBI on the increasing instances of MNCs delisting from the Indian stock exchanges and the possible negative impact on the securities market, as also about the non compliance by MNCs of the compulsory dilution of equity norms under FDI policy. As indicated by the MOF, these issues were also discussed in the Parliamentary Standing Committee on Finance and in the Parliament.

It was argued that permanent delisting of shares shrinks the universe of liquid stocks and thus affects depth and liquidity of the market, results in loss of investment opportunities for the public, and reduces the wealth of the securities market. The exit price offered to the shareholders is not perceived to be commensurate with the company’s fundamentals, its true worth and the permanent loss of investment opportunity, especially when delisting takes place under depressed market conditions. Minority shareholders seem to perceive that they are compelled to sell their shares at the offer price, even if the offer price is not in their opinion attractive enough, because they run the risk of holding an illiquid investment. The way in which delisting takes place at present is thus perceived as being unfair, both to the investors as well as to the market. The main concern according to the above argument thus does not appear to be so much against delisting per se, as against the inadequacy of investor protection through the prevailing exit price mechanism.

Taking note of the above issues and concerns which underpin the need to revisit the present delisting requirements and the listing conditions, SEBI decided in 2002 to set up a Committee under the convenorship of Pratip Kar, Executive Director SEBI with the following terms of reference:

1. to examine and review the present conditions for the delisting of securities of companies listed on the recognised stock exchanges including the delisting by MNCs and suggest norms and procedures in connection therewith

2. to review and standardise the listing agreement

3. to examine the concept of listing at regional stock exchange and the establishment of a listing authority across the stock exchanges.

4. to suggest ways for effective implementation of listing conditions and penal provisions for non-compliance

5. to recommend changes in laws, rules regulations etc. in order to give effect to the recommendations on the above mentioned matter.

The Committee held seven meetings. It examined the present conditions for listing and delisting of shares and the investor protection issues arising in the case of delisting of shares, the concerns arising from delisting by the MNCs, the present exit price mechanism available to shareholders, whether further refinement is possible to provide higher protection to investors, whether there is a need to introduce specific provisions to discourage this trend, listing conditions and the listing agreement, the relevance of regional stock exchange, and the need for Central Listing Authority (CLA).

The Committee submitted its report in August 2002. Its recommendations were considered and accepted by SEBI. Pursuant to the above Securities and Exchange Board of India (Delisting of Securities) Guidelines 2003, have been issued replacing the earlier guidelines issued in 1998.

Important Recommendations of Pratip Kar Committee on Delisting are discussed in the next article