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.
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)
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
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 Rs.one 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
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
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
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
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
(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
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
(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.
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