Take-private transactions are deals in which large or multiple private equity investors acquire a listed entity, which they thereafter privatise, that is, delist. While this allows a lucrative exit for shareholders of listed entities, the success rate of take-private transactions in India has been dismal. The failure or withdrawal of take-private offers has been attributed primarily to the rejection of the delisting price or an insufficient tender of shares by the public shareholders.
To address these issues, the Securities and Exchange Board of India (SEBI), issued the Securities and Exchange Board of India (Delisting of Equity Shares) (Amendment) Regulations, 2024 (regulations) in September 2024 to amend the SEBI (Delisting of Equity Shares) Regulations, 2021. The regulations have introduced a regime for delisting through fixed-price offers (FPO) for companies whose shares are frequently traded.
In an FPO, the acquirer sets a predetermined price at which it proposes to buy out the existing shareholders of the target. This is the offer price, which is at least 15% more than the floor price. This differs from the discovered price in a reverse book-building (RBB) process, where the acquirer sets a floor price, and the final offer price is determined by the price at which public shareholders agree to tender their shares. While the acquirer has the option to make a counteroffer in an RBB, this often leads to an excessively high discovered price, resulting in the failure or withdrawal of the take-private offer. To resolve this, the SEBI has introduced FPO and offer price mechanisms. These also provide comfort to potential acquirers and existing shareholders by reducing the price uncertainty in a take-private transaction.
It should be noted that in an FPO, there is no counteroffer or revised offer mechanism whereby the acquirer can propose a revised offer price should the public shareholders not tender their shares at the current offer price. Accordingly, while the dependency on shareholders for determining the offer price is less in an FPO, a low offer price may lead to an immediate failure of the take-private offer. This increases the onus on the acquirer to engage with the market for the purpose of price discovery. In the case of RBBs, the regulations have reduced the threshold for making a counteroffer from 90% to 75% for the post-offer shareholding of the acquirer. This is a welcome move from the SEBI and makes take-private transactions salvageable in case there is a failure because of the discovered price.
In another provision, the regulations have introduced changes in respect of determining the floor price. The adjusted book value has been included as an additional parameter for determining the floor price in both FPOs and RBBs. The reference date for computing the floor price has been amended to either the date of the initial public announcement (IPA) made by the acquirer in the case the IPA is made prior to the close of market hours, or the next trading day where the IPA was made after the close of market hours or on a non-trading day. This is again a welcome move from the SEBI because it negates the impact of the market’s reaction on the offer price and, consequently, the floor price. Previously, the reference date was taken as the date on which the SEBI was informed about the take-private transaction. This resulted in the volatile trading of the securities, which, in turn, had an adverse effect on the floor price.
While the regulations seek to encourage take-private transactions, there are some issues that remain to be resolved. An example is the case of Essar Oil Limited, where the sale was concluded about 18 months after a successful delisting. The SEBI mandates that acquirers compensate public shareholders for any price differentials if an M&A transaction with varying pricing is proposed during the take-private process, even if it does not close. Despite persistent demands from the market, the SEBI has yet to implement a buyout mechanism for residual shareholders who do not tender their shares in a take-private transaction or permit a combined open offer or delisting offer to be contingent on the acquirer securing more than a 90% ownership. Dealing with these problems in the next round of amendments will provide much-needed clarity for acquirers looking to structure take-private deals.
Bharucha & Partners – Vandana Pai and Priankita Das
