Indian Regulatory Changes To Boost Corporate Governance, Ease Delisting Process: Fitch
Moneylife Digital Team 18 October 2021
Recent changes made by the Securities and Exchange Board of India (SEBI) will tighten the rules governing related-party transactions (RPT) and ease the delisting process, says Fitch Ratings.
In a note, the ratings agency says, "The revised RPT norms will widen the scope of scrutiny and limit the ability of large shareholders - often the founder family or promoters - to enter into RPTs without the approval of minority shareholders. This should strengthen the corporate governance of listed companies." 
"The delisting changes should facilitate greater transparency and more effectively balance the interests of acquirers and public shareholders. They should also result in quicker execution. However, the impact on credit profiles will depend on the funding and capital structures after privatisation and the effects these will have on the linkages between various entities in each group," it added. 
The critical changes to RPT norms include expanding the definitions of a related party and an RPT, a tighter threshold for RPTs requiring prior approval of minority shareholders, and enhanced reporting requirements. These changes will take effect from April 2022. 
Fitch says, "We believe the amendments will help to plug the holes in the existing framework that have allowed major shareholders to access cash and assets of a listed subsidiary through RPTs at the expense of minorities."
A related party will include all persons or entities forming part of the promoter group irrespective of shareholding. Previously, only promoter entities holding more than 20% stake were considered related parties. Also, non-promoter entities with more than 20% stake before April 2023 and 10% stake from 1 April 2023 will be regarded as related parties.
The definition of RPTs will include transactions with any non-related party with effect from April 2023 if its purpose is to benefit a related party. "We believe this will reduce the use of complex entity structures that seek to circumvent the rules," Fitch added.
SEBI also amended the minimum threshold for RPTs requiring prior approval of minority shareholders to a value of Rs10 billion or equivalent to 10% of the consolidated sales of a listed entity, whichever is lower. The previous threshold was only 10% of consolidated sales. 
The ratings agency believes this will tighten the threshold, particularly for large corporates and enhanced disclosure requirements, such as notices to shareholders on material RPTs, and will also improve the governance framework.
According to Fitch, the revised delisting rules will allow an acquirer to announce its intent to delist the target company and disclose both the open offer price and the premium on the delisting price. 
If a sufficient number of shareholders choose to tender their shares, such that the delisting threshold of 90% of shares is met, then they will be paid the delisting price. Alternatively, if the 90% threshold is not met in the open offer, then only the open offer price will be paid and the acquirer will have 12 months to complete the delisting or reduce its holding to 75% to comply with listing rules. This, Fitch says, will significantly reduce the uncertainty in the price discovery process for both parties compared with the current process.
At present, an acquirer seeking to delist a company needs to make an open offer to buy a 26% stake from public shareholders. The acquirer then has to launch a bid to acquire at least 90% of shares through a reverse book-building process. 
Even if the acquirer reaches the 90% threshold in the open offer stage, it will first have to take a step in reverse and reduce its stake to 75% to comply with minimum public-shareholding levels for listed corporates and then launch a delisting bid. 
"This and the lack of clarity on the delisting price during the open offer results in significant uncertainty about price discovery and delays," the ratings agency says.
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