Reverse book building to be shelved

WITHOUT CONTEMPT

In a bold move, the Securities and Exchange Board of India (Sebi) has proposed to shrug off the unreasonable "reverse book building" concept from the law governing delisting of securities. Last week, Sebi published draft regulations to govern delisting from stock exchanges and acknowledged the problems posed by introduction of the reverse book building concept in the Sebi (Delisting of Securities) Guidelines, 2003.

If the objective of the guidelines was to make delisting next to impossible, it has been well served. Barely 14-odd companies have successfully delisted in close to four years after they were introduced.

However, this can also be a failure of the law. When an illiquid stock gets delisted, it is beneficial to the small shareholders since they get an exit opportunity.

However, the key is the price at which an exit opportunity is provided. The reverse book building concept killed the price discovery process. It only benefited high networth individuals who had the capacity to purchase a large quantity of shares of listed companies and thereby dictate the exit price.

The book building process itself is uniquely Indian. The entire bidding process is conducted in the public domain. Every bidder gets to know the price quoted by others. There is an unrestricted ability for anyone to revise the bid. Naturally, the reverse book-built price is often a king's ransom making life unfair for the acquirers.

Sebi has acknowledged that a scrutiny of the current price discovery process has vested disproportionate powers with public shareholders holding large chunks of securities. Candidly noting that the current process assists frivolous bids to destabilise the delisting offer, Sebi has admitted that the capacity to revise the bids has also led to cartelisation in price discovery. The book building process's aim of aiding price discovery has not met its objective, Sebi admitted.

Even while the process is proposed to be shelved, the perceived political correctness in making delisting next to impossible is sought to be continued. The exit price would now be 25 per cent above the minimum offer price under the takeover regulations (based on quoted price averages), or 25 per cent above the "fair value" (as computed by a rating agency), whichever is higher.

In other words, the "fair value" would have to be subverted by at least 25 per cent. A better alternative will be to make the fair value computation applicable only if it is higher than the average price under the takeover regulations. The best approach of course would be to simply restrict the fair valuation by external agencies to only infrequently traded stocks since the market is the best barometer of fair value when the stock is frequently traded.

There is another stance of political correctness that makes life unfair. Sebi rightly acknowledges that worldwide, a 10 per cent public shareholding level is considered apt as a delisting threshold. Therefore, even for companies that have to maintain 25 per cent public shareholding, delisting will not be successful unless the non-public shareholding crossees 90 per cent.

However, for companies where the public shareholding requirement to ensure continued listing is 10 per cent, Sebi wants the non-public shareholding to reach 96 per cent for the delisting exercise to be successful. This is uncalled for. There is no reasonable basis to continue having two classes of listed companies "� one requiring a 96 per cent holding to succeed in delisting and another requiring a 90 per cent threshold to succeed.

The draft regulations also propose some much-needed spring-cleaning of other inadequacies in the delisting guidelines. However, the two key differentiators in the delisting process are price discovery and exit threshold. One hopes the final regulations address these issues.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own)