Sebi scanner on valuation paid under compulsory delisting

At least a dozen public shareholders move the regulator alleging unfair treatment

The Securities and Exchange Board of India (Sebi) is training its guns at the promoters of companies that have been told to compulsorily delist, after public shareholders of several such firms moved the capital market regulator alleging that they were not being paid fair value by promoters. 

Sources said Sebi had started seeking explanations from promoters on the mode of valuation.

Unlike voluntary delisting, where a company decides on its own to remove its securities from a stock exchange, compulsory delisting is a kind of a penal action against a company for not fulfilling the requirements under the listing agreement. 

Typically, companies that are suspended from trading for not filing quarterly results or other disclosures are asked to delist by exchanges. Sebi last year asked such companies to provide fair value to public shareholders. The valuation is to be decided by an independent valuer. 

Sebi received over a dozen of complaints from various public shareholders against the companies facing delisting for not following proper process. Sebi officials met all the stakeholders, including stock exchange officials and company representatives, earlier this week to discuss the issue.

“Sebi and exchanges want companies to follow the fair value criterion with proper due diligence,” said an official who attended the meeting. “The (delisting companies) were told to share the details of their third-party audit report, basis of assessment and list of fixed assets,” he added.

On the BSE and the NSE, 1,200 companies have been suspended for more than seven years. 

“There have been a lot of complaints from investors on not being paid the fair value. However, we also need to understand that all these companies are very small, and promoters do not have enough resources to meet shareholders’ demand. The regulator should work out a middle path so that investors gets exit,” said Madhu Prasad, chairman, Keynote Corporate Services.

Sebi had recently amended the delisting rule which says the promoters of a company compulsorily delisted from stock exchanges cannot sell or pledge their shares until they provide a viable exit option to public shareholders, including buying them from the shareholders at a fair value.

Earlier, Sebi had empowered stock exchanges to compulsorily delist companies that violate the terms of their listing agreements or in which trading has been suspended for long periods. Promoters of such companies are barred from accessing the capital markets, directly or indirectly, for 10 years from the date of the company’s compulsory delisting.

“It is important for regulators to provide flexibility to promoters as well as a fair exit value to the minority shareholders. Current regulations provide for an opportunity to promoters to increase their shareholding but may be inadequate to ensure such exit is at a fair value to the non-promoter shareholders. Also, if a majority of the non-promoter shareholders don’t accept the offer price, such companies may then be required to be compulsorily listed,” said Darshan Upadhyay, partner, Economic Law Practice (ELP).