[Ayush Agrawal is a 4th year B.A.LL.B. (Hons.) student at National Law Institute University, Bhopal]
The regulatory landscape governing listed entities in India constantly evolves to address unique market challenges and governmental priorities of growth and welfare. A recent, significant development in India’s securities law is the introduction of regulation 38B under the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2021 (hereinafter, the ‘2021 Regulations’). This amendment creates a dedicated carve-out for the voluntary delisting of certain Public Sector Undertakings (PSUs), fundamentally altering the process for these government-owned entities.
Its objective is to resolve the specific difficulties that PSUs faced under the general reverse book building (RBB) process. This move aims to simplify the delisting process for government-owned entities, provide regulatory clarity. It is a crucial procedural reform designed to directly support the Government’s disinvestment strategy. This strategy involves privatising numerous PSUs by selling them to private acquirers. The old RBB process was a major deterrent to these sales, as a potential buyer faced an uncertain, complex, and potentially costly delisting path after acquisition. By creating a predictable, fixed-price mechanism, regulation 38B removes this significant hurdle, making these PSUs a more viable and attractive asset for the government’s strategic disinvestment pipeline,all while ensuring robust investor safeguards. Regulation 2(j) of the 2021 Regulations defines ‘Delisting’ as the permanent removal of a company’s equity shares from the trading platform of a recognised stock exchange, which can occur either voluntarily or compulsorily. Regulation 38B introduces special provisions for PSUs, subject to necessary modifications of the general regulations. Notably, this special framework excludes PSUs that fall under the purview of financial sector regulators, namely Banks, Non-Banking Financial Companies (NBFCs), and Insurance Companies. Regulation 38B thus replaces a market-based price discovery process with a more predictable, valuation-driven framework for a specific subset of PSUs.
The Pre-Amendment Position (Before September 2025)
Prior to this amendment, the delisting of all listed companies, including PSUs, was governed by the RBB mechanism under the SEBI (Delisting of Equity Shares) Regulations, 2021. This process required an acquirer to provide an exit opportunity to public shareholders, with the offer being deemed successful only if the post-offer promoter shareholding crossed the 90% threshold.
The floor price, which is the minimum price the acquirer could offer, was determined according to regulation 19A of the 2021 Regulations. This involved calculating the highest value derived from several parameters, such as the volume-weighted average price of acquisitions over the previous 52 weeks or the highest price paid in the last 26 weeks. For frequently traded shares, a critical benchmark was the volume-weighted average market price (VWAMP) over the preceding 60 trading days.
This created a significant challenge for PSUs. SEBI itself observed that many government-owned companies have a relatively small public float and sometimes weaker financials. The market often prices these stocks not just on performance but also on the implicit security that comes with government ownership. This tended to artificially elevate their market price, making it disproportionate to their actual book value or profitability. Consequently, relying on the 60-day VWAMP for these PSUs resulted in an unusually high floor price, which in turn meant a much larger budgetary expense for the Government to complete the delisting, making the entire exercise financially unviable.
Adding to the difficulty was the shareholder approval process. The old rules under regulation 11 had a very strict condition where a special resolution for delisting would only pass if the number of votes cast by public shareholders in favour of the proposal was at least twice the number of votes cast against it. This gave a small group of opposing public shareholders a disproportionate power to block a delisting, even in cases where the promoter holding was already very high.
The Post-Amendment Position (Regulation 38B)
Regulation 38B, inserted as Part-F in Chapter VI of the SEBI (Delisting of Equity Shares) Regulations, 2021, sets out a special, simplified process designed for specific PSUs. The special provisions are not available to all; they apply only to those PSUs where the combined shareholding of the government is already at 90% or more of the total issued shares. The logic for retaining this 90% threshold is that it aligns with the standard success benchmark for any delisting, justifying an easier mechanism where public float is already minimal.
For these eligible PSUs, the delisting must now be done through a fixed price process, completely doing away with the RRB mechanism. This applies regardless of whether the company’s shares are frequently traded or not, removing the ambiguity and price inflation issues of the past. The calculation of the floor price has also been revised for the PSU’s undertaking delisting through the mechanism laid down in regulation 38B. It cannot be less than the highest of three specific benchmarks: the VWAP of acquisitions in the last 52 weeks, the highest acquisition price in the last 26 weeks, or a price determined by a joint valuation report from two independent registered valuers. This valuation must be comprehensive, considering metrics like book value, discounted cash flow, and other industry-specific parameters.
Crucially, the final delisting price offered to shareholders must be at least 15% higher than the floor price determined through this new methodology. The stringent shareholder approval rule has also been relaxed. The requirement for public shareholder votes in favour to be at least two times the votes against has been removed for these PSUs. A special resolution passed via postal ballot or e-voting is still required, but the path to approval is now considerably less fraught.
Analysis
The introduction of regulation 38B into the delisting framework is better seen as a practical, though uncomfortable, compromise. It identifies a key problem about the RBB process, which is not suitable for PSUs with a strong government holding and a low public float. In these cases, a market-driven price discovery process is mostly theoretical. The regulation’s move to a fixed-price process directly addresses the fact that the market price of these PSUs is often overstated. This inflation is driven more by the perceived value of government backing than by actual financial performance. By replacing the 60-day Volume-Weighted Average Market Price (VWAMP) with a price based on a professional valuation, the regulation tries to replace market sentiment with financial reality.
Further, the regulation builds in safeguards to protect minority shareholders who lose the bargaining power of the RBB process. The primary pillar of this protective structure is the mandate for a comprehensive valuation from two independent registered valuers. Furthermore, the compulsory 15% premium over this determined floor price acts as a direct, quantifiable compensation for the exit. The mechanism to protect non-tendering shareholders by transferring their dues to a designated exchange and eventually to the Investor Education and Protection Fund(IEPF) also appears robust.
However, by replacing a market-driven mechanism with an administered one, the regulation concentrates the entire burden of minority shareholder protection onto a single, vulnerable point, the independence and rigour of the valuation process. This creates a new and complex set of risks. A critical conflict of interest arises from the fact that the PSU itself, as the promoter, appoints and compensates the “independent” valuers. This arrangement introduces the potential for subtle pressure to arrive at a valuation that aligns with the promoter’s financial objectives.
The subjective nature of valuation itself amplifies this concern. Methods like the discounted cash flow (DCF) analysis are very sensitive to assumptions about future growth rates, capital expenditures, and discount rates. For instance, consider a PSU in the infrastructure sector. A valuer’s assumption about the renewal of a major government contract five years from now could swing the valuation by hundreds of crores. Under the new rule, this subjective forecast, made by a valuer paid by the PSU, becomes the bedrock of the ‘fair price’ offered to minority shareholders. A minor adjustment to these variables can materially change the final valuation, making it a flexible tool rather than a rigid standard. This places a heavy responsibility on the personal integrity of the valuers and the supervisory capacity of the regulator.
This carve-out marks a major philosophical shift for SEBI. By establishing a special, non-market approach for the government as promoter, SEBI implicitly concedes that the market mechanism, which is central to its regulatory role, cannot reliably price these specific assets. This raises concerns about market integrity. If the market is deemed inefficient for pricing a PSU with a 90% government stake, it challenges the very principles that underpin our securities market. Regulation 38B is, therefore, a solution to a specific problem, but it is one that comes at the cost of introducing new risks and chipping away at the market-first principles governing our corporate landscape.
Conclusion and Way Forward
While regulation 38B appears to be is a pragmatic step in reconciling the struggles of policy efficiency and market integrity, its long-term success are contingent on whether SEBI can ensure independence, transparency, and rigour of the valuation process through its institutional framework, which is the most vulnerable point. To prevent the regulation from becoming a tool that merely rubber-stamps the promoter’s objectives, SEBI must decisively address the inherent conflict of interest that arises when the PSU itself appoints and pays its “independent” valuers. This can only be mitigated by mandating appointments from a pre-approved, neutral panel overseen by the regulator. Furthermore, the subjective nature of valuation methods must be countered with compulsory and granular transparency; the detailed valuation reports, including all critical financial assumptions, must be made public. Without these essential reinforcements, the regulation’s safeguards, including the 15% premium, risk becoming superficial. Therefore, while its intent is sound, the framework must be fortified to ensure that, in prioritising the government’s strategic disinvestment objectives, it does not unduly sacrifice market integrity and the foundational right of minority shareholders to a fair and transparent exit, which are the cornerstones of India’s securities regime.
– Ayush Agrawal