Indian regulatory changes to strengthen corporate governance and ease the delisting process: Fitch

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Recent changes by the Securities and Exchange Board of India (SEBI) will strengthen the rules governing related party transactions (RPT) and facilitate the delisting process, according to Fitch Ratings.

In a note, the rating agency states: “The revised PTR standards will broaden the scope of the review and limit the ability of large shareholders – often the founding family or promoters – to enter into PTRs 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 faster execution. However, the impact on credit profiles will depend on the financing and capital structures after privatization and their effects. have on the links between the different entities of each group, ”he added.

Critical changes to the TOR standards include expanding the definitions of a related party and a TOR, a stricter threshold for TORs requiring prior approval from minority shareholders, and improved reporting requirements. These changes will take effect from April 2022.

Fitch said: “We believe the amendments will help plug the holes in the existing framework that have allowed major shareholders to access the cash and assets of a listed subsidiary through TORs at the expense of minorities.”

A related party will include all the people or entities that are part of the promoter group, regardless of the shareholding. Previously, only promoter entities holding more than 20% of the capital were considered as related parties. In addition, non-promoter entities holding more than 20% of the capital before April 2023 and 10% of the capital from April 1, 2023 will be considered as related parties.

The definition of TOR will include transactions with any unrelated party as of April 2023 if its objective is to benefit a related party. “We believe this will reduce the use of complex entity structures that seek to circumvent the rules,” added Fitch.

SEBI also changed the minimum threshold for TORs requiring prior approval of minority shareholders to a value of Rs 10 billion or the equivalent of 10% of a listed entity’s consolidated sales, whichever is lower. The previous threshold was only 10% of consolidated turnover.

The rating agency believes this will tighten the threshold, especially for large companies and tightened disclosure requirements, such as shareholder notices on significant TOR, and also improve the governance framework.

According to Fitch, the revised write-off rules will allow an acquirer to announce its intention to delist the target company and disclose both the price of the open offer and the premium over the write-off price.

If a sufficient number of shareholders choose to tender their shares, so that the delisting threshold of 90% of the shares is reached, then they will be paid the delisting price. Alternatively, if the 90% threshold is not met in the open offer, only the price of the open offer will be paid and the acquirer will have 12 months to complete the delisting or reduce its stake to 75% to comply. to the listing rules. This, says Fitch, will significantly reduce the uncertainty in the price discovery process for both parties compared to the current process.

Currently, an acquirer seeking to delist a company must make an open offer to purchase a 26% stake from public shareholders. The buyer must then launch an offer to acquire at least 90% of the shares through a reverse bookbuilding process.

Even if the acquirer reaches the 90% threshold at the open offer stage, he will first have to take a step back and reduce his stake to 75% to meet the minimum levels of public participation of listed companies and then launch a delisting offer.

“This and the lack of clarity on the write-off price during the open offer cause significant uncertainty about price discovery and delays,” the rating agency said.


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