Delisting of equity shares is the permanent removal of equity shares of a listed company (hereinafter company) from a recognized stock exchange (hereinafter stock exchange). The delisting of equity shares by a company can be voluntary or compulsory. If the delisting of equity shares is compulsory, the company is compelled to delist its equity shares from the stock exchange. Whereas, if the delisting of equity shares is voluntary, it is the wish of the company to delist its equity shares from the stock exchange.

In India, the process for delisting of equity shares is provided under the SEBI (Delisting of Securities of Equity Shares) Regulations, 2021 (hereinafter Delisting Regulations). This article aims to provide an overview of the concept of voluntary delisting of equity shares and an outline of the procedure for voluntary delisting of equity shares from all the stock exchanges under Delisting Regulations.

Types of voluntary delisting
Voluntary delisting can be further divided into three categories:

1. Delisting from all the stock exchanges.
2. Delisting from few stock exchanges.
3. Delisting of small companies.

Circumstances in which the companies opt for voluntary delisting of equity shares

Usually, the companies opt for voluntary delisting of shares from the stock exchange in the following scenarios:

1. Undervaluation
   When the market value of equity shares does not reflect the true and fair value of the company for a long period of time.
    
2. Merger and Acquisition
   After the closure of an M&A transaction, equity shares of the merging or target company are delisted from the stock exchange and equity shares of the resultant company are traded.
   
   For example  After the merger of Ranbaxy with Sun Pharma, equity shares of Ranbaxy were delisted from the stock exchange on 6 April 2015. The shareholders of Ranbaxy received 0.8% of Sun Pharma in place of 1 equity share of Ranbaxy.
    
3. Negligent trading
   If there is negligent trading of equity shares of a particular company from a long period of time. In such a scenario, the company may choose to voluntary delist its equity shares from the stock exchange.
    
4. Absolute ownership and control
   When the promoters want absolute ownership and control of the company. The company in such a situation can opt for voluntary delisting of equity shares. Absolute ownership and control provide the promoters of the company with operational flexibility.
   
   For example: The equity shares of Alfa Laval India were delisted from the National Stock Exchange and Bombay Stock Exchange in the year 2012, pursuant to the delisting offer made by the promoter of the company (Sweden based  Alfa Laval Corporate AB) to the public shareholders.
    
5. Compliance and related cost
   The listed company may opt for voluntary delisting if it finds listing fees payable to stock exchanges and professional fees of various professional engaged by the company for compliance with various statutory requirements burdensome.

Circumstances in which delisting of equity shares is not permitted.

According to Regulation 4 of the Delisting Regulations, stock exchanges cannot permit the delisting of equity shares of a company in the following scenarios:

1. A period of 3 years has not expired from the listing of that class of equity shares on any recognized stock exchange.
2. If the instruments which are issued by the company and are convertible into that same class of equity shares, that are sough to be delisted are outstanding.
3. When the delisting is in pursuant to buyback of equity shares, including a buy-back which is in pursuant to consolidation or division or part of the equity share capital of the company, except in a scenario where three years has elapsed from the date of completion of such buyback.
4. If the delisting is in pursuant to preferential allotment and a period of 6 months has not elapsed from the date of such allotment.

Procedure for voluntary delisting of equity shares from all stock exchanges

According to Regulation 7 of the Delisting Regulations, the company can delist its equity shares from the stock exchanges, subject to the condition that exit opportunity is provided to all public shareholders of the class of equity shares which are sought to be delisted. In a scenario, where providing an exit opportunity is compulsory then the procedure stated in Chapter IV and Part III of Chapter V of Delisting Regulation needs to be followed which is stated below

Initial Public Announcement (Regulation-8)
When the promoters of the company decide to voluntary delist equity shares of the company, on such date the company should make an initial public announcement to all the stock exchanges on which equity shares of the company are listed, and the stock exchanges should forward the information to the public shareholders. A copy of the above announcement should also be sent to the registered office of the company within 1 working day from the date of the initial public announcement.

Additionally, the initial public announcement should

1. Specify the reasons for delisting.
2. Ensure compliance with sub regulations (2) and (5) of regulation 4 of delisting regulations.
3. Not omit any relevant information or contain any misleading information.

Appointment of Manager to the offer (Regulation-9)
The promoters of the company are required to appoint a merchant banker as the manager to the offer before making the initial public announcement. The manager to the offer will carry out the initial public announcement and ensure that the delisting process in compliance with the delisting regulations.

The regulation also prescribes the qualifications for the merchant banker who is proposed to be appointed as Manager to the offer by promoters of the company which are stated as follows:

1. The merchant banker should be registered with the Securities Exchange Board of India (hereinafter SEBI).
2. The merchant banker should not be an associate of the promoters.

Approval by Board of Directors (Regulation -10)
Within 21 days of initial public announcement, the company should obtain the approval of its Board of Directors with respect to the proposal of the promoters to delist the equity shares of the company. The Board of Directors before considering the proposal are required to appoint a Peer-Reviewed Company Secretary (hereinafter CS) and provide him following information for carrying out the due diligence:

1. Details of buying, selling and dealing in equity shares by the promoters or their related entities during the last two years from the date of the board meeting held to consider the proposal for voluntary delisting of its equity shares. The company should also provide the details of the top 25 shareholders of the company during the previous two years.
    
2. The details of off-market transactions of all shareholders.
    
3. The company should also provide any additional information beyond the period of last two years if the CS thinks the information provided to him is not sufficient to grant certification.

After, obtaining the above information CS has to carry out the due diligence and submit the report to the Board of Directors. The report submitted by the CS shall certify that buying, selling and dealing of equity shares of the company by the promoters or its related entities, and by the top 25 shareholders during the above-mentioned period complied with securities law.

The regulation also requires the Board of Directors of the company, to certify the following while considering the proposal for delisting:

1. The company is in compliance with the provision of securities law.
2. The promoters and their related entities complied with the applicable provisions of securities law in terms of the CS.
3. The delisting is in the interest of the shareholders.

After arriving at the decision, the Board of Directors are required to inform the decision to the stock exchanges along with the due diligence report of the CS. The stock exchange will disseminate such information to the public shareholders.

Shareholders approval through special resolution (Regulation -11)
The prior approval of the shareholders of the company is also required for the voluntary delisting of equity shares. The approval of shareholders should be obtained in the form of a special resolution, in which voting is done only through postal ballot. The explanatory statement sent to the shareholders for such resolution shall contain all the material facts with respect to delisting.

The special resolution passed by the shareholder will stand approved only if the votes casted in favour of the resolution by the public shareholders are two times the votes casted against it.

Application for in-principle (Regulation -12)
After obtaining the approval of shareholders, the company needs to make an application to the concerned recognized stock exchange for in-principle approval of the proposed delisting. The application should be submitted along with an audit report covering the period of the last 6 months from the date of filing the application.

The recognized stock exchange has to dispose off the application for in-principle approval within 15 days from the receipt of the application. The recognized stock exchanges while considering the application will take into consideration the following:

1. Resolution of investors grievances.
2. Compliance with SEBI regulations.
3. Payment of listing fees to the stock exchange.
4. Compliance with listing agreement.
5. Pending litigation or action pending against the companies with respect to its activities in the securities market or any other matter which has an adverse impact on the interest of the shareholders.

Determination of discovered price (Regulation-20)
The discovered price should be determined through reverse book building after fixing the floor price. The Manager to the offer should disclose the discovered price in the detailed public announcement and letter of offer. The floor price used for determining the discovered price is calculated in terms of regulation 8 of SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011.

Note: The reference date for computing the floor price would be the date on which the stock exchanges were required to be notified of the board meeting in which the proposal of delisting of equity shares was considered.

The regulation also states that the promoters can provide an indicative price to the shareholders, which should be higher than the floor price. The promoters are also given a chance to revise the indicative price upwards before the bidding period.

Opening of Escrow Account (Regulation-14)
The promoters are required to open an escrow account with the scheduled commercial bank, within 7 working days from obtaining approval of the shareholders, deposit therein 25% of the total consideration to be paid to the equity shareholders. The estimated amount is calculated based on the total number of equity shares outstanding multiplied by the floor price or indicative price.

Further, the regulation provides that an escrow account should consist of either cash deposits or bank guarantee in favor of the Manger to the offer, or a combination of both. It can also be maintained at interest-bearing, with a condition that funds are available when needed.

Public Announcement (Regulation -15)
The promoters are required to make a detailed public announcement within 1 working day of receipt of in-principle approval for delisting. The detailed public announcement should be published in:

1. One English national newspaper with wide circulation.
2. One Hindi national daily newspaper with wide circulation.
3. One regional language newspaper where the recognized stock exchange is listed.

Lastly, the detailed public announcement should contain all the material information relating to the delisting of equity shares.

Dispatch of letter of offer (Regulation -16)
The promoters are required to dispatch the letter of offer to the equity shareholders, within 2 working day from the date of public announcement. The regulation provides that letter of offer should be sent to all the public shareholders whose names appear on the register of the company or depository on the date of public announcement.

Further, it states that the letter of offer should contain all the relevant disclosure that may necessary for the shareholders to make an informed decision. The bidding form for use of shareholders for tendering shares should also be attached with the letter of offer.

Bidding period (Regulation -17)
It is the period in which the shareholders tender their shares in acceptance of the delisting offer made by the company.


The offer should be opened within 7 working days from the date of public announcement. Further, the offer should remain open for 5 working days.

The discovered price will be determined after the bidding process. If the promoters accept the discovered price, then they have to make a public announcement in the same newspapers in which the detailed public announcement was made, stating that the bidding process was successful.

Minimum number for equity shares (Regulation -21)
An offer is deemed to be successful if:

The post-offer shareholding pattern of the promoters along with persons acting in concert reaches 90 % of the total issued share capital excluding

1. Shares held by a custodian against which depository receipt have been issued overseas.
2. Shares held by a Trust for implementing an Employee Benefits Scheme under the Securities Exchange Board of India (Shares Based Employees Benefit) Regulations, 2011.
3. Shares held by vanishing or struck off companies; shares transferred to the Investor Protection and Provident Fund Account.

Payment for consideration (Regulation -24)
The consideration has to be paid to the public shareholders whose bids are accepted at the indicative price or discovered price whichever is higher. The regulation provides for two scenarios for the payment of consideration to the shareholders:

1. If the discovered price is equal to the floor or indicative price, payment to the shareholders has to be made through secondary market settlements.
2. If the discovered price is higher than the floor price or the indicative price, then the payment to the shareholders has to be made within 5 working days from the date of the public announcement of the discovered price.

Application to Stock Exchange (Regulation 25)
After the success of the offer, an application should be made to the stock exchange along with all the necessary proofs of providing exit opportunity to the public shareholders.

Delisting order by the recognized stock exchange (Regulation-25)
The stock exchange is required to dispose off the application within 15 working days from the receipt of the application. After the disposal, equity shares of the company are permanently delisted from the recognized stock exchanges.

Circumstances in which the company does not have to follow the procedure under the Delisting Regulations

Regulation 3 (2) of the Delisting Regulations provide for two situations in which the companies do not have to follow the procedure prescribed under Delisting Regulations:

1. When equity shares of the company are listed and traded in innovators growth platform of a recognized stock exchange without making a public issue.
2. When the delisting of equity shares is done pursuant to resolution plan under section 31 of the Insolvency and Bankruptcy Code, 2016, If such plan
   
   1. Lays down a specific procedure for delisting of equity shares.
   2. Provides for exit option to the existing public shareholders at a price stated in the resolution plan.
    

Example: Piramal Housing Capital and Finance acquired Dewan Housing Finance Corporation (DHFL) through Corporate Insolvency Resolution Process. The resolution plan provided for the delisting of equity shares of DHFL, so it does not have to follow the procedure prescribed under the delisting regulations.

Conclusion
Delisting of equity shares may be a perfect step for the companies, whose stock prices faced a sharp fall due to the unprecedented situation caused by Covid -19.

References:

1. Securities Exchange Board of India (Delisting of Equity Shares) Regulations, 2021, https://www.sebi.gov.in/legal/regulations/jun-2021/securities-and-exchange-board-of-india-delisting-of-equity-shares-regulations-2021_50517.html.
2. Monisha Chaudhary, Procedure of Delisting of Equity Shares on Stock Exchange, Swarita Advisors, ( Aug, 28,2019), https://swaritadvisors.com/learning/procedure-for-delisting-of-equity-shares-on-stock-exchange/.
3. Mohit Gogia, Kanika Khanna & Kastubh Madhavan, Mondaq, (Jul, 02, 2020), https://www.mondaq.com/india/shareholders/961082/voluntary-delisting.