Delisting of Securities

Delisting of Securities

New Rule 21 of SCR Rules 1951 as well as the Regulations issued by the SEBI seek to

govern delisting of shares. However, SCR Rules seem to run in conflict with SEBI

Regulations and suffer from incongruities. As this would not be desirable there is an

urgent need to address this.

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A company intending to offer securities to public and raise

resources is required to list such securities in one or more

recognized Stock Exchanges to provide ready liquidity and a

platform for price discovery to investors. Having so raised

resources from the general public, a listed company is subject

to rigorous reporting and disclosure requirements. Business

by nature involves change. A company or its promoters may

like to opt out of public funding and lay emphasis on greater

flexibility and minimal disclosure by reorganising their

business. Delisting of securities comes as a useful tool under

these circumstances. Such delisting doubtless has to be

accomplished with utmost comfort as protection to the

outstanding public investors. Regulations and Guidelines for

delisting seek to fulfill these objectives.

Fresh Regulations on Delisting

Section 21A was introduced in the Securities Contracts

(Regulation) Act, 1956 (SCR Act) effective 12-10-2004. It

permitted recognized Stock Exchanges to delist securities on

any of the ground or grounds as may be prescribed in this

Act. An aggrieved company or investor has right of appeal

before the Securities Appellate Tribunal.

In furtherance of the above, Rule 21 has now come to be inserted

in the Securities Contracts (Regulation) Rules, 1957 (SCR

Rules). It deals with delisting compulsorily inflicted by stock

exchange as well as voluntary delisting initiated by a company.

Simultaneously SEBI has issued the Securities and Exchange

Board of India (Delisting of Equity Shares) Regulations, 2009

(SEBI Regulations) on 10-06-2009. They would prospectively

operate in place of erstwhile SEBI (Delisting of Securities)

Guidelines, 2003.

Both SCR Rules and SEBI Guidelines on delisting have been

notified on the same day namely 10-06-2009. They deal with

the same subject towards regulating delisting and protecting

public shareholder. The duplicity of regulations and the

dichotomy of provisions inherently inconsistent with each other

could have better been avoided. In particular, SCR Rules would

seem to run in conflict with SEBI Regulations and suffer much

from deficiencies and incongruities in dealing with the issue

on hand.

Securities Contracts (Regulation) Rules

A comprehensive list of disqualifications has been conceived

to trigger compulsory delisting by Stock Exchanges. A stock

exchange is authorized to delist the securities in accordance

with the regulations made by SEBI on following grounds:

􀂄 Losses suffered by listed entity during the preceding three

consecutive years leading to negative networth

􀂄 Suspension of trading in the securities for more than 6 months

􀂄 Infrequent trading in the securities during the preceding 3


􀂄 Conviction of company, its promoters or directors for

violation of SEBI Act, Depository Act and related Rules

and Regulations leading to imposition of penalty of more

than crore or imprisonment for more than 3 years

􀂄 Non traceability of company, its promoters or directors

􀂄 Fall in public shareholding to below minimum threshold


Voluntary delisting can be permitted by Stock Exchanges

subject to following conditions:

􀂄 Minimum period of 3 years of listing

􀂄 Approval of delisting by two-thirds of public shareholders

􀂄 Exit option to public shareholders except when listing

continues in NSE/ BSE


SEBI Regulations

The SEBI Regulations also deal with both voluntary and

compulsory delisting. It offers exit opportunity except when

listing continues in NSE or BSE. It provides for fair price

determination for exiting shareholders and payment security

for them.

Even in the case of compulsory delisting by Stock Exchanges,

rights of public shareholders are sought to be protected by

mandating the promoter to acquire the delisted shares by paying

them the value determined by the valuer, subject to their option

of retaining their shares. Further the company, its whole-time

directors, its promoters and companies which are promoted

by any of them shall not directly or indirectly access the

securities market or seek listing for any equity shares for a

period of 10 years from the date of such delisting.

Responsibility to protect public shareholder

The genesis of company as a form of business entity stems

from limited liability concept. A company is distinct and

separate from the persons associated therewith. Such a

corporate veil can be lifted only in certain events like frauds

and misdeeds of persons owning or controlling its operations.

Recent exceptions to the above gospel were after the advent

of SEBI and its imposing certain obligations on promoters

and their associates. Such a trigger arises in the event of change

in substantial ownership or management [SEBI (Substantial

Acquisition of Shares and Takeover) Regulations,1997] and

also in the case of delisting of securities. Relevant SEBI

Guidelines stipulate the need for mandatory public offer and

acquisition of public shareholding at a fair price. Such a

prescription is of course understandable and also well justified

to protect the interest of public shareholder.

SCR Rules – Rule 21(2)(b) and Rule 21(3)(c) - however make

every company, promoter and director to be jointly or severally

liable to purchase the outstanding securities from those holders

who wish to sell them at SEBI formula price. It is strange that

every director, be it an independent or professional director,

is included in the list of persons responsible for protecting

public shareholder through such acquisition.

In fact, a company cannot purchase its own shares from the

shareholders that would expressly violate Section 100 of the

Companies Act, 1956. This can be done only with the approval

of Court. Thus the requirement of Rule 21 of SCR Rules clearly

runs contrary to the Companies Act and to that extent is patently


On the contrary, SEBI Regulation imposes such an obligation

only on the promoters that would seem both pragmatic and


Delisting from all stock exchanges

Rule 21(2) of the SCR Rules catalogues the consequences of

compulsory delisting. Clause (b) of this Rule prescribes that

when once the securities of a company are delisted by one

stock exchange, they shall be delisted from all recognized stock


This stipulation though well intended is impracticable. It is

likely that the securities of a company may be infrequently

traded in one stock exchange but it might have regular trading

in other exchanges. Hence compulsory delisting in one

exchange cannot ipso facto lead to delisting from all stock

exchanges. At best this shall be confined to cases of fraud or

vanishing company or its promoters.

Further at present there is no mechanism available for effective

exchange of information between stock exchanges. An earlier

attempt to have a Central Listing Authority could not succeed

leading to the repeal of SEBI (Central Listing Authority)

Regulations 2003. The salutatory provision in Regulation

22(6)(b) of SEBI Regulations may not suffice to trigger unified

and coordinated action by all Stock Exchanges.

Approval for voluntary delisting

Rule 21(3) of SCR Rules deals with voluntary delisting on the

request of a listed company. This however calls for the approval

of such a proposal by the two-thirds majority of public


The Companies Act, 1956 contemplates two types of resolutions,

namely, ordinary and special. While the former is passed with

simple majority, a special resolution requires three-fourth

majority. All the businesses of a company are dealt with only

through ordinary or special resolution. One notable exception

of course is the approval for a Scheme of Arrangement or

Compromise under Section 391 that not only requires threefourth

in value but also a simple majority in number of

shareholders or creditors attending the relevant meeting.

It looks therefore strange that for the first time a different

kind of majority, namely, two-third is being prescribed under

the new SCR Rules. For both uniformity and consistency,

there shall not be too much variance or tinkering in imposing

the criterion to decide upon requisite majority.

While the requisite resolution shall be approved by two-third

of public shareholders, neither SCR Act nor SCR Rules define

the term ‘public shareholder’. This term is defined only in

SEBI Regulations. While SEBI Regulations borrow the

definitions in SCR Act or SCR Rules, the vice versa is rather

conspicuous by its absence.

Curiously, Rule 19(2)(b) of SCR Rules prescribing minimum

Delisting of Securities


public holding in a listed entity excludes the holdings of Central

or State Government, their Agencies and Public Financial

Institutions from the scope of public shareholder. Logically

their shareholding cannot in the event of delisting be treated

as non public shareholding.

In fact the concept of interested directors and their exclusion

for the purpose of quorum and voting rights is presently

confined only to a Board meeting in the Companies Act. All

shareholders, whether interested or disinterested, are entitled

to their respective share of votes in a general meeting with the

only rider that disclosure of interest is given in the explanatory

statement. The departure from this tenet is of course

unexceptionable to protect public shareholder.

The relevant provision in SCR Rules is however ambiguous as it

requires the approval by two-third of public shareholders. It fails

to clearly state whether such an approval is by way of number or

value of public shareholders. It is equally vague whether the twothird

majority must represent the entire population of public

shareholders or only those participating in the voting. SEBI

provisions on the other hand are clear and unequivocal on this.

Comparative provisions of SCR Rules and SEBI

Delisting Regulations

SCR Rules and SEBI Delisting Regulations operate in the same

field and are overlapping and conflicting in many provisions.

A comparison of broad features is made hereunder.

Description SCR Rule SEBI Guidelines

Protection of public shareholders in case of Company, promoter and director Only promoter is liable to purchase shares.

compulsory or voluntary delisting are jointly and severally liable to

purchase the outstanding securities.

Persons eligible for exit option All the holders who wish to sell at Only public shareholders

fair price

Approval for voluntary delisting from one No separate procedure – Approval Approval by a resolution of Board of

or more SE on continuing listing with either required by the two-third Directors in its meeting

NSE or BSE of public shareholders.

Approval for voluntary delisting from one By the two-third of public (i) Prior approval of Board of Directors in

or more SE without presence in NSE or BSE shareholders its meeting.

(ii) Prior approval of shareholders by

special resolution passed through

postal ballot.

(iii) Above special resolution further

requires two-third consent of public


Passing of resolution by shareholders No special resolution is insisted Special resolution shall be passed through

postal ballot.

Voting by public shareholders Approval shall be by two-third of Provisions clearly spelt

public shareholders – The two-third majority shall be in terms of

– whether this is by number or votes cast in favour of resolution thereby

value is left vague meaning two-third majority by value and

– Also whether two-third of public representing those voting.

shareholder or only those voting

must approve is


Definition of promoter and public No definition – No reference of Promoter and public shareholding clearly

shareholding SEBI Act or Regulation – Rule defined.

19(2)(b) excludes Government/

Institutional shareholding from

the scope of public shareholding

Compulsory delisting Compulsory delisting by one No such provision – Only intimation by

exchange would lead to delisting delisting exchange to other exchanges

from all other stock exchanges

Delisting of Securities


Delisting from NSE/BSE

SEBI Delisting Regulations, 2009 do not explicitly bar a

company delisting its securities from NSE/ BSE to continue

with its listing in other stock exchanges. The only condition

for doing so is to offer an exit option to public shareholders.

This however runs contrary to SEBI’s policy to insist upon

mandatory listing in NSE/ BSE.

Press Release No.192/ 2009 dt.18-06-2009 conveys the

decision of SEBI Board meeting towards listing of IPOs on

Stock Exchange with nationwide trading terminals.

Henceforth an unlisted company making IPO shall list the

securities on at least one stock exchange having nationwide

trading terminals. This is with a view to provide adequate

liquidity and trading platform to investors in the securities

of the company.

No company so far appears to have exited NSE/ BSE and persists

with listing only in regional stock exchanges. However such a

possibility does exist and hence SEBI Delisting Guidelines shall

explicitly bar same to align with its latest policy decision towards

mandatory listing of IPOs in NSE/ BSE.

Old SEBI Guidelines v. New Regulations

The new Regulations of SEBI are doubtless more

comprehensive and they overcome some of the inadequacies

of old Guidelines. A broad comparison of the two is made


Sl. Description SEBI Delisting Guidelines, 2003 SEBI Delisting Regulations, 2009


1 Types of Delisting (i) Voluntary delisting by promoters (i) Voluntary delisting by company

(ii) M&A/Scheme/Arrangement reducing (ii) Compulsory delisting by SEs

Public shareholding below minimum


(iii) Consolidation of shareholding by

persons in control of management

(iv) Compulsory delisting by SEs

2 Minimum Listing period Three years on any Exchange Normally three years. Not applicable when

for Voluntary Delisting after delisting, shares remain listed in NSE/


3 Approval for Voluntary By shareholders through Special Resolution (i) Board Resolution where no exit option is

Delisting passed at General Meeting required.

(ii) Board approval plus Special Resolution

of shareholders passed through postal

ballot in other cases

(iii) Additional condition that such Special

Resolution shall have the support of twothird

majority of public shareholders

4 Approval of SEs Single stage approval (i) Single stage approval where no exit option

is required.

(ii) In other cases, two-stage approval – First

in principle and then final approval

5 Time limit for SE approval Nil 30 working days from the date of receipt of

Application complete in all respects

6 Appointment of Merchant Bankers to be appointed In addition other intermediaries as are

professionals considered necessary shall be appointed

7 Record Date to determine No explicit provision Public announcement to state ‘specified date’

Delisting of Securities


eligible Public for this purpose that shall be within 30 working

Shareholders days of public announcement

8 Payment Security No explicit mention of escrow account Regulation 11 contains detailed prescription

and conditions therefor, excepting broad of escrow account

mention in Schedule I & II

9 Letter of Offer No specific prescription Detailed prescription under Regulation 12

10 Holders of Depository No specific reference Specifically excluded from public offer


11 Minimum Shares to be To raise minimum public holding to Additional criteria of acquiring 50% or more

acquired from Public threshold level of offer size

12 Rights of remaining Tender securities at the same price during Time limit extended to one year from the date

shareholders further 6 months period from delisting of delisting

13 Consequences of Nil except exit option for public Additionally, the company, its wholetime

Compulsory Delisting shareholders directors, its promoters and the companies

promoted by any of them are denied access to

securities market for 10 years.

14 Delisting by small No special provisions Simplified procedure introduced under Chapter

companies and by VII.

operation of Law

15 Relisting of Delisted Uniform waiting period of 2 years Varying waiting period of 5 – 10 years.


Transitional Provisions

Regulation 31 deals with transitional provisions. Where a

company has initiated steps for delisting or an application for

delisting is pending with SEs, it shall be covered by the

provisions of old Guidelines. Even where an exit opportunity

is completed or an exit opportunity has been initiated but not

completed, the remaining procedures will have to be complied

with under the old Guidelines.

The new Regulation contains a time limit of one year from

the date of passing Special Resolution by shareholders to

make the final application to the concerned SEs. On the

contrary, there was an open ended time limit for such Special

Resolution under the Guidelines. This gave rise to a spate of

queries from various market participants to SEBI for


Responding to the above, SEBI has now clarified on

14.09.2009 on the interpretation of Transitional Provisions.

Only where the Special Resolution of members has been acted

upon within a period of three months from the date of the

clarificatory circular, old Guidelines would apply. For this

purpose, the activities to implement includes the opening of

the book building process in the determination of exit price.

Otherwise, the company would come under the new Regulation

and it has to pass a fresh Special Resolution of members to

proceed with delisting.


The new set of delisting provisions have come to strengthen

the interest of public shareholders, while simultaneously

facilitating the promoters’ objective to have greater control

and flexibility of operations. It however looks odd and odious

to have two different pieces of legislations dealing with the

same subject matter. Since SEBI has been given the task of

market regulator and responsibility to protect common investor,

the delisting regulations shall be under the sole domain of

SEBI. The discernible disconnect and dissonance between SCR

Rules and SEBI Regulations may lead to avoidable

complications and defeat the underlying objectives. Hence the

operating part of new Rule 21 of SCR Rules would merit

annulment at once. 􀂉

Sl. Description SEBI Delisting Guidelines, 2003 SEBI Delisting Regulations, 2009


Delisting of Securities


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