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Book building is a two-way street
November, 30th 2006


The reverse book-building mechanism has been working fairly well whereas the same cannot be said of its reverse, the book-building mechanism.

The Securities and Exchange Board of India's proposal to do away with the reverse book-building route of price discovery at the point of delisting is at odds with its implicit faith in the fairness and appropriateness of the process of book building for price discovery at listing.

That the price discovery at listing is a farce given the fait accompli price band the prospective bidders are presented with is another matter worthy of a separate debate.

When a company says bidding has to be within a narrow wall of, say, Rs 250 to Rs 300 for its shares of the face value of Rs 10, the price has effectively been already determined, with the bidders having the freedom only to fine-tune it so to speak.

Fair to both sides

Be that as it may, no such farce characterises the reverse book-building mechanism what with the average of weekly highs and lows for the last 26 weeks representing a fair starting point for the reverse bidders unlike in the case of bidders in book-building process who have perforce to go along with the price band already discovered by the issuer in consultation with the merchant banker.

Moreover, under the extant guidelines, there is absolutely no compulsion on the delisting company to accept the discovered price the price at which maximum number of shares is offered for sale. If the price thus discovered is too high, the exercise would stand aborted at the discretion of the promoter and would have to be revived again through the same process if he is keen on delisting. This is eminently democratic, being fair to both the sides.

Adding a premium

What is now proposed is to add a 25 per cent premium to the average of highs and lows of the last six months and juxtapose it against the valuation to be made by an accredited rating agency. The exit price obviously would be the higher of the two. The addition of premium admittedly would be arbitrary.

Indeed in the takeover game, control premium inevitably has to be paid but that is negotiated across the table with the ultimate premium being directly in proportion to the intensity of the passion of the acquirer.

But what is visualised now at the point of delisting does not bear comparison with control premium because delisting happens at an advanced stage when the company is firmly under control of the promoter. In the event, the premium of 25 per cent definitely would be arbitrary if not excessive.

Mandating valuation by accredited rating agencies, like any valuation exercise, would also be subjective. At any rate, it is ironical that faith should be reposed in such valuation at the point of exit, whereas what the public wants is a dispassionate valuation at the point of entry.

SEBI's voluntary IPO rating regime does not call upon the rating agency to comment upon the asking price much less give its own valuation of the shares. The reverse book-building mechanism has been working fairly well whereas the same cannot be said of its reverse, the book-building mechanism.

At any rate, so long as book building remains the price discovery method at the point of entry, it should also be the method at the point of exit. Delisting moreover is not a regular exercise. Rather it is an aberration. That the regulator should lose sleep over an aberration is a tad difficult to fathom.

S. Murlidharan
(The author is a Delhi-based chartered accountant.)

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