The process by which the exit price of the shares of a corporate entity is determined, is called reverse book building. This happens where a firm exits from the stock market through the delisting process.
Reverse book building allows shareholders to tender their shares at a price of their choice and the acquirer the freedom to accept or reject the offer.
Recently there was a move by the Hewlett Packard (HP) to get Indian subsidiary “DigitalGlobalsoft” de-listed through reverse book building.
Features / Benefits
1) Offer from shareholders: Reverse book building essentially involves generating offers from the seller (shareholders) who have no indication of the buyer’s intention on the price that the buyer is willing to pay for the strategic value of the company.
2) Exit price: Reverse book building is used as a method of arriving at the exit price for delisting of shares. The exit price will be determined on the basis of the average of weekly highs and lows of either 26 weeks or 52 weeks. Such a price will be the minimum offer price.
3) Fair price: Reverse book building process is expected to provide a transparent, fair, and reasonable mechanism for pricing of shares and ensure investor participation in the whole process of de-listing.
4) Reasonable pricing: Reverse book building process is expected to provide a transparent, fair, and reasonable mechanism for pricing of shares and ensure investor participation in the whole process of delisting.
5) Viable solutions: It focuses on viable solutions for determining “fair price” to the shareholders in the case of outright acquisition of 100 percent equity stake by multinational or domestic promoters/ persons in control of the company to gain full control the Indian companies.
The reverse book building process as required under the SEBI guidelines will utilize the trading system network of the stock exchanges now being used in the Initial Public offering (IPOs). The acquirer determines the floor price of the offer based on the average prices for 26 weeks proceeding the date of public announcement. Shareholders are then allowed to tender their shares at or above the floor price. Once the reverse book building process is completed the final price will be determined as the price at which the maximum shares are tendered. While this provides the shareholder an opportunity to determine the price, the acquirer has the right to accept or reject the price so discovered. In case, the acquirer accepts the price, all shareholders who bid at to below the discovered price, will receive the discovered price for their holdings.
Despite many advantages claimed by the reverse book building process, it is criticized on the following grounds:
1) Manipulations: The process of reverse book building is prone to manipulation, as it would operate on a restricted audience, as against an IPO, which is open to the general public. The possibility of getting a fair price for shareholders in the reverse book building process is limited, as this process is subject to manipulation in the hands of more experienced and savvy shareholders.
2) Low participation: Moreover, the participation of the small shareholders (or the public) will be extremely low as their understanding of the process is imperfect.
3) Price Indication: Any open offer de-listing should indicate the price that the buyer is willing to pay.
4) No fair price:
Under the rising market conditions, the floor exit price which is based on the 26 week average may not be truly reflective of the current market price. Hence, such a price will not serve as a useful benchmark for the investor.
5) Non-acceptance: Although the shareholders command the flexibility of tendering their shares at any price, they also run the risk of their shares not getting accepted if the acquirer finds the price unattractive.
6) False price: There is a bigger risk of speculators spreading false information in the market and thereby increasing the share price to unrealistic levels and selling the stock back to small investors.