What is Delisting?
Delisting is the removal of the trading and listing of a security from a stock exchange. The process of delisting securities for an Indian listed company is governed by the securities market regulator, Securities and Exchange Board of India (SEBI).
As per SEBI (Delisting of Equity Shares) Regulations, 2021 (“Delisting Regulations”), once shareholder approval through postal ballot and/ or e-voting with a required majority and in-principle approval from the stock exchanges where the company is listed, are obtained, the next key step in the process is to issue the detailed public announcement and the letter of offer. Upon issuance of the offer documents, the bidding mechanism will commence wherein the public shareholders are given an opportunity to participate in the reverse book building (“RBB”) process to determine the delisting price.
All eligible public shareholders holding equity shares in physical or demat form can participate in the RBB process. The letter of offer with bidding/ tendering steps and relevant timeline will be sent to eligible shareholders in due course.
The Delisting offer shall be considered successful if the equity shares accepted through the Delisting offer takes the shareholding of the Acquirer (along with the other members of the promoter and promoter group) to at least 90% of the paid-up equity share capital of the Company in accordance with the Delisting Regulations.
What is the tax framework?
Under the current tax laws in India, the sale of equity shares in an Indian company attracts capital gains tax. Whether the shareholder is a resident or non-resident, any gains from selling listed equity shares on a recognized stock exchange will be subject to capital gains tax in India. In delisting offers conducted through a domestic stock exchange, Securities Transaction Tax (STT) is collected by the stock exchange and deducted from the amount of consideration payable to the shareholder.
For shareholders who hold shares for a period up to 12 months before the delisting offer, the gains will be treated as short-term capital gains and taxed at 15%, as per Section 111A of the Income Tax Act, 1961. On the other hand, shareholders holding shares for more than 12 months will be subject to long-term capital gains tax at 10% on gains exceeding Rs. 1 lakh, as per Section 112A and Section 55(2)(ac) of the Income Tax Act, 1961. Taxability of capital gain arising to a non-resident in India from the sale of equity shares is evaluated on the basis of provisions of the Income Tax Act or the Double Taxation Avoidance Agreement entered between India and country of which the non-resident seller is resident, subject to satisfaction of prescribed conditions. These tax rates are subject to applicable rate of surcharge, health and education cess. The tax rate and other provisions may undergo changes.
In case the delisting is successful and remaining shareholders who have not tendered their shares in the RBB process might be charged a higher rate of tax as they would be holding unlisted shares.
What are the other advantages of participating in the RBB process?
The Acquire along with the person acting in concert that have successfully managed to delist the companies have paid a lucrative premium ranging between c. 10% to greater than 200% in some cases. Details of a few of these delisting offers are provided below:
It must be noted that the floor price that is announced at the time of announcement of delisting is not fixed by the management; it only serves as the minimum price offered by the acquirer and calculated as per the Delisting Regulations.
The actual price is determined through the RBB process, where greater public shareholder participation means greater opportunity with the public shareholders to establish the delisting price.
However, once the delisting offer is successful through acceptance by the acquirer, the remaining public shareholders who have not participated in the RBB process, have a right to tender their equity shares for at least one year from the delisting date at the RBB though those shares would be treated as unlisted shares for the tax calculation.