delisting: At whose cost?
Notwithstanding the structural shortcomings in
our framework, the pathetic monitoring of listed companies and mechanical
delisting by BSE has rewarded corporate misgovernance at the cost of small
investors, says Virendra Jain
securities from the stock exchange is carried out in two ways: voluntary and
compulsory. Its norms and procedure have been laid down by Sebi (Delisting of
Securities) Guidelines, 2003. Voluntary delisting can be enforced by the
promoter or any other person, excepting the SE. Prior to delisting, it requires
approval of shareholders by a special resolution, make a public announcement,
the contents of which should include proposed methodology for determination of
offer price, historical data relating to securities market price and volume,
shareholding pattern, necessity and objective of delisting, etc.
An exit opportunity, at a minimum floor price is
to be offered to the shareholders. The shareholder can bid/demand a higher price
than the one offered through the “reverse book-building” process. The offer may
fall if it fails to receive minimum quantity required or the offeree refuses to
revise the purchase price upwards, as discovered. For instance, Astra Zeneca
management proposed a price of Rs 825 but the discovered price was around Rs
3,000. The management rejected the offer and proposed delisting was dropped.
‘Compulsory’ delisting can be done by SE as per
the norms laid down, which includes non-compliance of the terms of the Listing
Agreement (LA) by a company. Prior to delisting, show-cause notices are to be
sent to the company but no intimation and exit option is required to be given to
the non-promoter shareholders. Only wide public notices — through newspapers and
notice boards — are to be issued by the SE. Post delisting, the shareholders are
entitled to get fair value of their securities but the mode and manner laid down
for enforcement of the same, is hazy.
first half of 2004, Bombay Stock Exchange (BSE) delisted a whopping 992
companies (out of total 5,500 listed companies) for non-compliance of the terms
of the listing agreement. Admittedly, BSE did not take any penal action under
section 23(2) of SCR Act) against them, in spite of a Sebi direction to
exchanges to do so. These companies were defaulters for more than three years.
Moreover, over 400 of these companies were not available, to BSE, at their
addresses and hence, under the scanner of CMC for identification and declaration
as a “vanishing company”. We at www.investorhelpline.in received investor
grievances against 97 of these companies. Among 992 companies delisted, some of
them were profit making and some had a healthy book value per share. The
shareholders of these companies — which may number over 10 lakh — are generally
unaware of the delisting as they were neither informed at any stage, what to
talk about the exit option and price offered. The number of shareholders and
status of fair value option exercised was not known to BSE. All this was not
required, as per BSE’s reply, conveyed through Sebi, under the RTI Act.
Such retrograde action by BSE against the
interest of aam investor begs the question: Is it merely an instance of callous
administration or a manifestation of a deeper malaise affecting the system? For
a better understanding, the framework for listing and delisting adopted by some
developed nations may be looked into.
India, the US and 25 member countries of European Union have adopted a two-tier,
autonomous regulation of companies: through the regulator and the SE. In US, the
regulator, Securities & Exchange Commission (SEC) grants ‘registration’. In
UK, ‘listing’ is granted by FSA (Financial Services Authority), through its arm,
UK Listing Authority (UKLA). This registration/listing is a prerequisite for
getting the securities admitted for trading on any of the nine national
securities exchanges including New York Stock Exchange (NYSE) in the US and
London Stock Exchange main market, respectively. UKLA and SEC (with financial
data etc.,) displays a list of companies listed with it, while Sebi does not.
POST listing, the companies have to comply with
various regulatory obligations and furnish information to their respective
regulator and SE, separately, on an on going basis. FSA listing rules include
that a listed company must act with integrity and communicate information to
holders or potential holders so as to avoid creation or continuation of a false
market in such listed securities. On a breach, FSA & LSE, have independent
powers to suspend listing, impose sanctions and cancel listing.
For late filing of reports to FSA by companies,
financial penalties can be imposed, which are based on the annual listing fees
and period of delay. The penalty — for delay up to 28 days — ranges from 10
times to 60 times of the annual listing fees for each breach and higher for
delay beyond 28 days. In addition, disciplinary action can be taken against the
management. Further, the disciplinary committee of the LSE is empowered to
impose any or all of the sanctions, viz., censure, unlimited fine, order that
issuer make restitution to pay any person (when the issuer has profited from a
breach at that person’s expense) and cancellation to have its securities listed
on the exchange. However, the order is effective only after ten days, and, if
appeal is filed, from the date the appellate authority orders so.
Under the US laws, NYSE requires listed
companies to meet original listing criteria and maintain continued listing
standards. An elaborate procedure has been laid down for exchange — initiated
(compulsory) delisting. On non-compliance, the company is given an opportunity,
in most of the cases, to submit a plan for compliance within 18 months. For
delisting, at lease 10 days prior public notice by the exchange is mandatory
after which the SEC registration and its disclosure/filing requirements
continue. Similarly, procedure adopted for deregistration by SEC has in-built
mechanism for dissemination of prior information to investors so as to provide
them an exit option.
structural shortcomings in our framework, the pathetic monitoring of listed
companies, non-enforcement of financial penalties (now up to Rs 25 crore) in the
SCR Act and mechanical delisting by BSE has rewarded corporate misgovernance at
the cost of small investors. As non-compliance was a wilful act, white-collar
crime in some instances cannot be ruled out.