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All you wanted to know about reverse book building

| Updated on January 19, 2018 Published on January 04, 2016

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The stock of oil processing company Essar Oil has gained over 30 per cent in the last three weeks. That’s not because of a new oil find, but because of its decision to delist from the stock exchanges. But why should a stock soar if it is bidding goodbye to the bourses? Attribute it to the reverse book-building process, which usually results in healthy gains for shareholders in listed firms!

What is it?

Reverse book building is the process by which a company that wants to delist from the bourses, decides on the price that needs to be paid to public shareholders to buy back shares. Here, it has to follow a detailed regulatory process. The first step is appointing a merchant banker to oversee the electronic bidding. The banker and promoter then advertise the offer and dispatch a letter detailing the floor price for the buyback to all public shareholders. Stock exchanges then facilitate a reverse book building process through an online, fully automated, screen-based bidding system. Shareholders who hold shares can approach trading members or brokers to relay their bids to the company.

The tender price or the price at which the shareholder is willing to sell his shares needs to be equal or above the floor price notified by the company. The final buy back price will be determined only after the offer closes after aggregating all shareholder bids. For instance, in the case of Essar Oil, the final buyback price has been announced as ₹262.80 apiece. This is the price at which the holding of the promoter group hits 90 per cent, based on the offers received. Once the price is finalised, all offers below or equal to this final buy back price will be accepted.

The offer is termed successful only if a minimum number of shares, as defined by regulation 17 (a) of the Delisting Regulations, are tendered by shareholders and accepted by the company.

Why is it important?

This convoluted process for delisting ensures that Indian promoters don’t hop on and off the stock exchange platform at whim. Given that investors bid in an auction to invest in an IPO, it is only fair that they be allowed to use a similar auction to decide the exit price when a company wants to bid goodbye to them. If companies are allowed to decide on a buyback price on their own, they can shortchange lay investors by undervaluing the business. Reverse book building, through a transparent auction, allows investors to discover the price that is acceptable to them when they are asked to surrender all their ownership rights in a company.

Why should I care?

If you are an equity investor, it helps to know the delisting / reverse book building process. The management of the companies in your portfolio may decide to delist it from the stock exchange for various reasons. They may feel that the market is not doing the firm justice or they may see big value in the business which they don’t want to share with minority shareholders. If you are a trader, there’s also plenty of moneymaking opportunity in delisting news. Given that delisting is often concluded at an exit price that is above the prevailing market price for a stock, delisting rumours have been known to send some stocks into the stratosphere.

The bottomline

If you want to keep your financials away from prying eyes, you will need to pay off shareholders for it.

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Published on January 04, 2016
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