When a committee set up by the Securities and Exchange Board of India (Sebi) in 2002 recommended a ‘reverse booking building’ process that would allow investors themselves to determine the price at which companies delisted their shares from the bourses, corporate India was deeply sceptical. A representative of the Confederation of Indian Industry (CII) gave a dissent note and a second committee member privately expressed his misgivings to the regulator. Arguments against reverse book building began from fears that savvy investors would manipulate the process, apprehension about shareholders’ ability to arrive at an appropriate price and complaints that the process itself was highly convoluted. Ironically, industry opposed the process, not out of fear that they would have to pay more, but on the claim that investors would not get a fair deal. Instead, they argued for a formula based pricing or wanted companies to decide the exit price themselves.
Fortunately, Sebi chose to accept the committee recommendation and also addressed India Inc’s fears by mandating that the discovered price will be one at which the most number of bids are received. This eliminates the possibility of a few investors sabotaging the deal by bidding too high and it protects ignorant investors who may give away their shares too cheap. By February 2005, the reverse book-building route had been adopted in a dozen cases (as per data on the National Stock Exchange website). Of these, as many as 10 companies had accepted the price sought by a majority of their shareholders. Only two companies rejected the discovered price; of these Vickers International has announced plans for a second round of reverse book building in another effort to delist its shares.
The next few days may see Sebi asking Holcim to drop its open offer for Ambica Eastern Cement (AECL) shares and convert it into a reverse-book. Investors believe the company will fix the reserve price at around Rs 70, but could end up paying over Rs 100 per share. Only 5% of the stock is in the public domain and the scrip is likely to be delisted. The Sterlite group’s Madras Aluminium Company is also in line to seek similar delisting.
Not only do the statistics suggest a remarkable success rate, but the reverse book process appears simple enough to implement. The fact that Infosys officials wanted the reverse book building mechanism to be used to garner shares for their billion dollar sponsored ADR also indicates its growing acceptance. By opting for an exchange-based mechanism, Infosys hoped to persuade the government to permit its investors to pay a tiny Securities Transaction Tax (STT), instead of the 10% capital gains tax payable on non-market transactions.
Of the 10 successful cases of reverse book building, data shows investors of seven companies have exited the stock at or near the reserve price fixed by the company. These investors either believed that the reserve price was fair, or were simply happy to get out. Either way, neither the investors nor the companies seem to be complaining about pricing. Companies that were able to delist at or near the reserve price were — Sharadha Terry products (floor price and discovered price Rs 22), Spencer & Company (Floor Rs 45, discovered price Rs 50), Ideaspace Solutions (floor Rs 12, discovered price Rs 15), Rochees Breweries (floor price Rs 14.20 and discovered price Rs 19.20), SRP Tools (floor price Rs 34, discovered price Rs 35) and Amalga-mation Repco Ltd (floor and discovered price Rs 121).
• The reverse book process has proved to be simple in its implementation
• Neither companies nor investors seem to be complaining about the pricing
• Sebi needs to study the process closely to find how the bid price is arrived at
In CTR Manufacturing Industries Ltd, the floor and discovered price were Rs 180, but the last traded price of this share on the Bombay Stock Exchange appears to have been half the discovered price, at Rs 90. In Digital Global Soft, e-Serve International and India Gypsum, investors seem to have extracted a substantial premium on the market price, but the companies accepted it. The discovered price in Digital GlobalSoft was Rs 850 as against a floor price of Rs 566; in e-Serve the floor was Rs 735 and the discovered price Rs 975, while in India Gypsum it was Rs 120 against a floor price of Rs 89. These companies chose to pay the higher price.
Vickers System International and Astra Zeneca Pharma, however, rejected the price discovery. Of these Vickers had ended with a discovered price of Rs 185, against a floor range of Rs 63.60 and declined to pay up an 80% premium. It will be interesting to see if its second delisting attempt finds investors climbing down from their earlier demand, or the company accepting a higher exit price. In Astra Zeneca Pharma, the discovered price was a high Rs 3,000, as against the floor price of Rs 825 and a market price in the region of Rs 927. The company clearly rejected such a hefty premium, but it is a mystery why so many investors had attempted to extract a high premium for the shares.
Preliminary data suggests corporate apprehensions about reverse book building may have been exaggerated and many more companies will be walking down this path to delisting. Given the widespread investor anguish over the loss of investment opportunities due to companies delisting their shares, the data suggests investors have used their power to decide the exit price fairly maturely.
But Sebi needs to study the statistics closely to arrive at a firm conclusion. It must find how many investors participate in the process and how they arrive at their bid price. The Vickers and Astra Zeneca cases are especially important because a majority of their investors seem to have demanded a hefty premium to market price. The pattern of bidding in this case would reveal if there have been any attempts to influence the price and whether the process needs to be further fine-tuned or publicised, in order to educate in-vestors into making informed bids.