COMPULSORY DELISTING

[DR.MARIAPPAN GOVINDARAJAN]

Compulsory delisting by a stock exchange

Regulation 32 of the Securities Exchange Board of India (Delisting of Equity Shares) Regulations, 2021 (‘Regulations’ for short) provides for the compulsory delisting of a list company by a stock exchange.  A recognized stock exchange may delist the equity shares of a company by a reasoned order.  No securities shall be delisted unless the company concerned has been given a reasonable opportunity of being heard.

Grounds for delisting

Rule 21(1) of Securities Contracts (Regulation) Rules, 1957 indicates the grounds on which the stock exchange may delist of the equity shares of a company.  The following are the grounds-

•  the company has incurred losses during the preceding three consecutive years and it has negative net worth;
•  trading in the securities of the company has remained suspended for a period of more than 6  months;
• the securities of the company have remained infrequently traded during the preceding three years;
• the company or any of its promoters or any of its director has been convicted for failure to comply with any of the provisions of the Act or the Securities and Exchange Board of India Act, 1992 or the Depositories Act, 1996 or rules, regulations, agreements made there under, as the case may be and awarded a penalty of not less than ₹ 1 crore or imprisonment of not less than 3 years;
• the addresses of the company or any of its promoter or any of its directors, are not known or false addresses have been furnished or the company has changed its registered office in contravention of the provisions of the Companies Act, 1956/2013; or
• shareholding of the company held by the public has come below the minimum level applicable to the company as per the listing agreement under the Act and the company has failed to raise public holding to the required level within the time specified by the recognized stock exchange.

Decision by a panel

The decision for the compulsory delisting shall be taken by a panel to be constituted by the recognized stock exchange consisting of –

• two directors of the recognized stock exchange one of whom shall be a public representative;
•  one representative of an investor association recognized by the Board;
• one representative of the Ministry of Corporate Affairs or Registrar of Companies; and
• the Executive Director or Secretary of the recognized stock exchange.

Notice

The recognized stock exchange, before passing an order shall give a notice in at least one English national newspaper with wide circulation, one Hindi national newspaper with wide circulation in their all India editions and one vernacular newspaper of the region where the relevant recognized stock exchange is located, of the proposed delisting, giving a time period of not less than 15 working days from the date of such notice, within which representations, if any, may be made to the recognized stock exchange by any person aggrieved by the proposed delisting and shall also display such notice on its trading systems and website.

Order

The recognized stock exchange shall, while passing any order consider the representation, if any, made by the company and also any representation received in response to the notice shall comply with the guidelines provided in Schedule III of these regulations.

Guidelines

Schedule III to the Regulations gives guidelines for compulsory listing.  The provisions of the guidelines are as below-

• The recognized stock exchange shall take into account the grounds prescribed in the rules made under the Securities Contracts (Regulation) Act, 1956 while compulsorily delisting the equity shares of the company.
• The recognized stock exchange shall take all reasonable steps to trace the promoters of a company whose equity shares are proposed to be delisted, with a view to ensuring compliance with sub-regulation (4) of regulation 33.
• The recognized stock exchange shall consider the nature and extent of the alleged non-compliance by the company and the number and percentage of public shareholders who may be affected by such non-compliance.
• The recognized stock exchange shall take reasonable efforts to verify the status of compliance with the provisions of the Companies Act, 2013 and the rules and regulations made there under, by the company with the office of the concerned Registrar of Companies.
• The names of the companies whose equity shares are proposed to be delisted and their promoters shall be displayed in a separate section on the website of the recognized stock exchange. If delisted, the names shall be shifted to another separate section on the website.
• The recognized stock exchange shall in appropriate cases file prosecutions under relevant provisions of the Securities Contracts (Regulation) Act, 1956 or any other law for the time being in force against identifiable promoters and directors of the company for the alleged non-compliances.
• The recognized stock exchange shall, in appropriate cases, under the applicable provisions of the Companies Act, 2013, file a petition for winding up the company or make a request to the Registrar of Companies to strike off the name of the company from the register.

Intimation of order

After the passing the delisting order the Stock Exchange shall publish a notice in one English national newspaper with wide circulation, one Hindi national newspaper with wide circulation in their all India editions and one vernacular newspaper of the region where the relevant recognized stock exchange is located, of the fact of such delisting, disclosing therein the name and address of the company, the fair value of the delisted equity shares determined under these regulations and the names and addresses of the promoters of the company who would be liable under sub-regulation (4) of regulation 33 of these regulations.

The said order shall be intimated to all stock exchanges.  A copy of the order shall be uploaded in the website of the stock exchange.

Exit opportunity

Chapter IV of the Regulations contains the provisions regarding to the exit opportunity.  The provisions of Chapter IV of the Regulations shall not be applicable to compulsory delisting.

Valuation

Regulation 33 provides for the valuation of the equity shares of the company that are to be delisted.  The recognized stock exchange shall appoint an independent valuer(s).  The independent valuer(s) shall determine the fair value of the delisted equity shares.

The recognized stock exchange shall form a Panel of expert valuers.  The valuers shall be appointed from the said panel.  The value of the delisted equity shares shall be determined by the valuer(s) having regard to the factors mentioned in sub-regulation (2) of regulation 20 of these regulations.  Regulation 20(2) provides that the floor price shall be determined in terms of regulation 8 of Takeover Regulations as may be applicable.

Payment by promoters

The promoter(s) of the company shall acquire the delisted equity shares from the public shareholders by paying them the value determined by the valuer, within 3 months of the date of delisting from the recognized stock exchange, subject to the option of the public shareholders to retain their shares.  If the promoter fails to pay the same within 3 months time  he shall be liable to pay interest at the rate of 10%  per annum to all the shareholders, who offer their shares under the compulsory delisting offer.

Waiver of interest

In case the delay was not attributable to any act or omission of the acquirer or was caused due to the circumstances beyond the control of the acquirer, the Board may grant waiver from the payment of such interest.

Consequences of compulsory listing

If the stock exchange passed an order of compulsory listing equity shares of a company, the company, its whole-time directors, person(s) responsible for ensuring compliance with the securities laws.  The promoters and the companies which are promoted by any of them shall not directly or indirectly access the securities market or seek listing of any equity shares or act as an intermediary in the securities market for a period of 10 years from the date of such delisting.

In case the fair value of the shares of the company is positive the following compliances are to be complied with-

• the company and the depositories shall not effect transfer, by way of sale, pledge, etc., of any of the equity shares held by the promoters / promoter group and the corporate benefits like dividend, rights, bonus shares, split, etc. shall be frozen for all the equity shares held by the promoters/ promoter group, till the promoters of such company provide an exit option to the public shareholders in compliance with sub-regulation (4) of regulation 33 of these regulations, as certified by the relevant recognized stock exchange;
• the promoters, whole-time directors and person(s) responsible for ensuring compliance with the securities laws, of the compulsorily delisted company shall also not be eligible to become directors of any listed company till the exit option as mentioned in clause (a) is provided.

Monitoring the compliances

The stock exchange(s) shall monitor the compliance of the provisions relating to compulsory delisting and take appropriate action for non-compliance thereof in accordance with the provisions of these regulations.