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Nearly 15 years after the reverse book-building method of price discovery was introduced, SEBI is studying if it can do away with it for de-listing companies.
A source close to the development told BusinessLine that one of the options suggested by an expert committee was to replace the current de-listing method with the tender offer route, where the company promoters would give shareholders a price range.
While there is a consensus within SEBI that the reverse book-building method needs to go, the alternative is yet to be fine-tuned, the source said.
SEBI wants to simplify the process of de-listing companies from stock exchanges to plug holes in the rules that could lead to potential misuse.
The premise of the reverse book-building method was that investors had to bid in an auction to buy shares in an IPO, so in giving them an exit, a similar procedure should be followed.
Floor price
Under reverse book-building, the average closing price of an equity share in the previous 26 weeks or six months is set as the floor or the minimum price that the shareholders will have to be paid by the promoters who intend to de-list.
The floor price is often set assuming that it is higher than the ruling or prevailing price in the stock market. Shareholders then have an option to tender their shares at the floor price or quote the price above it. After the closure of the bid, the company has to consider a cut-off price for buying the shares back at which the maximum number of shares were bid.
The promoters reserve the right to accept or reject the bid. History shows that such a method had its pitfalls.
Pitfalls in earlier system
“Doing away with reverse book-building could be good as the process was often rigged,” said Sandeep Parekh, founder, Finsec Law Advisors.
“The pricing power under reverse book-building was with those few who could corner shares and play the game. But it will not be nice if the new method too is similar to the current one as a tender offer does not sound much different,” he added.
Ahead of a de-listing announcement, promoters would typically corner shares through front entities and tender them at the lowest price. Also, in many cases market operators jacked up the share price once they got a whiff of the imminent de-listing.
“Finding a process for de-listing that is fool-proof and that largely benefits retail shareholders remains a task for the regulator, and it will be interesting to see what course it takes,” said a former SEBI official.
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