Reverse Book Building - The Pros & Cons Will reverse book-building ensure fair play? THE EFFICACY of reverse book-building as a means to ensure fair play for small investors of 3 company exiting from indian stock exchanges has come into sharp focus recently. The move by Hewlett Packard (HP) to get its Indian subsidiary Digital Globalsoft delisted through reverse book- building for buying back residuary holdings provides an opportunity to discuss the pros and cons of this process. The Securities and Exchange Board of India had issued the SEBI (Delisting of Securities) Guidelines, 2003 which would make this process mandatory for all such cases. Revers® 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," says A. Murugappan, Joint Head, Investment Banking, M & A Advisory, ICICI Securities (|-Sec). The SEB! guidelines have ushered in a new regulatory tramework and should have a far-reaching impact on dalisting activity The reverse book building process as required under the guidelines will utilise the trading system network of the stock exchanges now used in Initiel Public Offarings (IPOs). The acquirer determines the floor price for his offer based on the average prices for 25 weeks (daily high & low prices of the stock) preceding the date of public announcement. shareholders are then allowed to tender their shares at or above the floor price. The SEBI has stipulated that there will be no cap or maximum price. Once the book building 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 wio bid at or below the discovered price will receive the discovered price for thetr holdings. In the current rising market conditions, the floor price based on the 26-week average will be lower than the current market price and hance will not sarve as a useful benchmark for the investor Whie the shareholders have the flexibility to tender their shares at any prica, they also run the risk of their sheres not getting accep ted if the acquirer finds the price unattractive. Unlike under the Takeover Regulations where the acquirer has to acquire all the shares tendered in the offer (regardiess of crossing the delisting limits) at the offer price he has datermined, uncer the new guidelines, the acquirer has the right to accept or reject the price as determined through the reverse book building process, Further, if the price is rejected, the acquirer will not acquire any shares tendered under the offer and all shares will be returned to the shareholders. Thus it is essential the shareholders gt some indication about the level at which the acquirer is willing to buy out the shares to avoid making this process a fruitless exercise. Not only this, there is a bigger risk of speculators spreading false information in the market and increasing the share price to unrealistic levels and selling the stock to small investors, The absence of any guidance can lead to the creation of a fals2 market which will ultimately be detrimental to the shareholders, as they may buy shares in the market at high prices only to realise that these may not get accepted when they tender in the offer. This will result in a sharp fall in share prices, Interestingly, in IPOs the SEBI has now allowed for indication ot a price band instead of a floor price. Moreovar, if the deal size is small, speculators could corner stocks and drive the price up for the delisting,