Sebi’s PSU delisting proposal sparks calls for parity with private companies

The proposal would essentially allow the PSU to delist itself, either to go private, merge with another company, or because the costs of being publicly listed outweigh the benefits.

Sebi said the move would benefit PSUs with very low public shareholding and/or weak financials, as noted in the 6 May consultation paper. 

It reasoned that the proposal could help profitable firms that lack long-term business prospects due to outdated product lines or government decisions to sell or shut down specific units.

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PSUs and private sector divide

Legal experts and market participants say that while the move could fast-track the government’s disinvestment plans and simplify the exit process for illiquid state-owned firms, it risks creating a dual regulatory standard between PSUs and private sector companies.

“The delisting regulations are intended to benefit the market and its various participants – as a general principle, any carve-out should be made available equally to all listed companies," said Abhishek Dadoo, partner at Khaitan & Co. “Not to say there isn’t rationale for the carve-out to be extended to PSUs– but it would be beneficial to extend it to all eligible listed companies."

Currently, even companies with over 90% promoter holding must first dilute to meet the 25% minimum public shareholding norm before initiating a delisting.

Sebi’s proposal seeks to bypass this requirement for eligible PSUs, allowing them to delist directly by offering a fixed exit price at a 15% premium over the floor price, instead of going through the reverse book-building (RBB) process.

According to Narinder Wadhwa, MD & CEO of SKI Capital Services, while the fixed-price route may work for thinly traded PSUs and streamline the delisting process, it raises questions around price discovery and investor fairness. “Unless there is full transparency in how the floor price and the 15% premium are determined, the credibility of the delisting process could be questioned," he said.

Brokers also expressed concern that this method may not serve the interests of investors in frequently traded or undervalued PSUs, where the market price does not reflect intrinsic value.

“The RBB process, despite its limitations, offers a degree of negotiation and fairness that a fixed-price route may not guarantee," Wadhwa said.

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Limited public shareholding

Another key concern is that many PSUs already have a low public float. Brokers believed that rather than addressing this issue, the proposal appeared to circumvent it, potentially aggravating the problem of limited retail and institutional participation in the PSU space.

“A healthy level of public shareholding is vital for improving transparency, governance standards, and broader investor engagement. Exempting certain PSUs from minimum public shareholding norms may undermine these goals and reduce the market’s attractiveness for long-term investors," Wadhwa said.

The proposal also relaxes the two-thirds public shareholder approval requirement—a key safeguard under current delisting rules. Under the proposed carve-out, a simple majority would suffice.

Dadoo cautioned that this relaxation “certainly compromises minority shareholder protection," but acknowledged the rationale. “At the same time, it ensures that a minority is not able to hold the delisting process at ransom. In such a case, the tried and tested simple majority might prove to be a viable solution."

He added that while a 15% premium is aligned with the generally adopted rule for regular delisting offers, it is critical to ensure the floor price is appropriately calculated for frequently and infrequently traded shares based on market price and independent valuation report, respectively.

Governance experts also flagged concerns about unequal treatment. “All companies where the promoter owns more than 90%, are loss-making and have little or no business to be listed should be considered for delisting," said Shriram Subramanian, founder of proxy advisory firm InGovern. “This consultation paper only benefits PSUs, but provides minority shareholders a one-time exit."

Subramanian argued that providing certainty of timelines and pricing could encourage more promoters to consider delisting, but cautioned against creating a PSU-only pathway.

Dadoo echoed this sentiment. “Historically, PSUs have been given more leeway under Indian regulation for various reasons, including larger public interest. However, this approach creates an unfair playing field in an otherwise free market," he said. “Providing greater flexibility is always welcome, but it should be extended to all eligible players in the larger interest of the market participants."

Sebi’s proposal is also seen as aiding the Centre’s divestment strategy, particularly for loss-making or dormant PSUs. “Delisting is a crucial tool in enabling disinvestment, as an unlisted company can often be a more attractive target," Dadoo said. “The carve-out solves the imminent problem of providing exit to listed companies without negatively impacting the market."

The regulator has invited public comments on the proposal until 19 May.

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