Should the reverse book building process be made simpler?

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Reverse book building is an interesting process - It is not like a regular open offer. One needs to quote the price to the entity, which is trying to buy the shares.

Sometimes all that is indicated in the floor price above which the bids are expected to come in. In many of these cases, the response from the public has not been great.

TV Raghunath, Executive Director at Kotak Investment Banking and Ashok Wadhwa of Ambit Finance comment on the reverse book building process.

Excerpts from CNBC - TV18's exclusive interview with Ashok Wadhwa and TV Raghunath:

Q: A lot of people are a bit confused about the reverse book. They are not sure how much to bid, what to bid, what will be acceptable and many stay out. Is there a way to make it simpler so that the success ratio or acceptance ratio is a bit higher?

Wadhwa: If you look at the background of how this legislation was introduced, this legislation was introduced because the regulator found that large companies with dominant ownership were able to de-list companies without offering minority small shareholders a fair opportunity to determine the price at which the delisting should offer.

Therefore the basic background under which this regulation was legislated was to try and have a mechanism where the minority shareholders who may not be as sophisticated and as intelligent as the large institutions have a fair ability to be able to decide the price at which they want to allow a company to get delisted.

Therefore the background, the thought process behind introducing reverse book building was a very fair thought process to allow minority shareholders an opportunity to decide whether to delist or not to delist and at what price.

What has really happened in some of the more recent cases is because the process requires that the price is determine on the basis of the largest tender offer or the price at which the largest number of shares are being offered, minority shareholders have no ability to be able to play that important role which was designed for them.

Anybody who is a large institutional shareholder is now the determinant of the price and if he does not want to sell, the minority shareholders are stuck with continuing in the company. And if he does not want to sell at the fair price the company is obviously not going to accept the delisting price or the price that is found through the delisting process.

So it forces the minority shareholders who may want sell at, what he determines as a fair price, have to continue and will not be able to exit the company. So I am not sure that the legislation is actually, as currently drafted, actually achieving the objective for which it was originally intended.

Q: How many of these offers actually do not fructify in your opinion because of irrational expectations because when you are talking delisting anybody has the freedom to bid at whatever price with no ceiling. Do you often find bids coming in at abnormally high prices? Since you made the point about the large investor, could it be possible that the secondary market price is nudged up a bit to achieve a higher price in delisting?  

Wadhwa: Actually it has nothing to do with nudging up the price because the larger shareholder is going to determine and the price at which he tenders the shares very often -as we have seen in the recent past- have absolutely no connection with the price ruling in the market place.

The early two ones were Electrolux and Etan that happened about 12-16 months ago and both of them were very successful because there were no large institutional shareholders, minority shareholders tendered at some premium to the market price which was fair and the acquirer was very happy to pay the premium and delist the company.

There is no doubt in my mind that if the shares should prevail or trade at a fair price, some premium should be paid for delisting the company, whether the premium is 20-40% is obviously dependent on each case separately. If you look at the two recent cases, where we have had failure, which is both Herbertson and now Blue Dart.

You will see that the price it was tendered were so different. For Blue Dart, the average price at which the market was operating over a three month period was something like Rs 500 and the shares were tendered at Rs 950. To expect anybody to pay a 100% premium, and what's more important, for somebody to pay 72 multiple on the current profit, is a bit of an exaggeration.

So I would say the two recent examples clearly demonstrate clearly demonstrate that the reverse book building price to some extent is resulting in a exaggerated expectations and clearly, that's going to fail the process.

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