what is Reverse Book building?

A unique process...

Reverse book building is a process used in financial markets, particularly in the context of share buybacks or the delisting of shares from stock exchanges. Unlike traditional book building where companies raise capital by issuing new shares, reverse book building involves the company or a promoter buying back shares from existing shareholders.

In reverse book building, shareholders are invited to tender their shares at a price they deem fair. The company sets a floor price, and shareholders can submit bids above this price. The final buyback price is typically determined based on these bids, reflecting the price at which the majority of shareholders are willing to sell.

Scope of Reverse Book Building

Share Buybacks: Companies use reverse book building to repurchase their own shares from the market. This can help in managing surplus cash, improving financial ratios, or consolidating ownership.
Delisting: When a company decides to delist from a stock exchange, it uses reverse book building to buy out the shares held by public shareholders at a fair price.
Corporate Restructuring: It can be used in restructuring processes where a company wants to reduce the number of outstanding shares or make significant changes in its ownership structure.

Effect of Reverse Book Building

Share Price Impact: The announcement of a buyback can positively impact the share price as it signals confidence from the management in the company’s future prospects.
Shareholder Value: It can unlock value for shareholders who sell their shares at a premium to the market price.
Ownership Concentration: It can lead to higher ownership concentration by promoters or major shareholders, which may impact corporate governance and decision-making.
Liquidity: A reduction in the number of shares available in the market can affect the liquidity of the stock.
Financial Metrics: Metrics like earnings per share (EPS) can improve post-buyback due to a reduced number of outstanding shares, which can positively affect the company’s valuation.

“Industry has been telling that they have found problems there… very early we will be taking this forward to the advisory committee. We will say that if you have a requirement for delisting, you can also have a fixed price. If that does not work, then you can try the reverse book building. If that fails, then we will give you time again, may be three years, two years, one year… depending on the discussions we have with the markets and with the advisory committees. That will go a long way in helping companies who don’t want to be listed,”

The Securities and Exchange Board of India (SEBI) has been focusing on reverse book building recently to protect investors and ensure market stability. Here are the main reasons:

Fair Valuation for Delisting: Reverse book building ensures a fair and transparent delisting process. Shareholders can propose a price for their shares, helping to find a fair market-driven exit price.
Investor Protection: It protects minority shareholders by allowing them to participate in pricing during buybacks or delisting. This prevents promoters from setting low prices that could harm minority shareholders.
Market Integrity and Transparency: The process promotes transparency and fairness in buybacks and delistings. An open bidding process reduces price manipulation and ensures fair transactions.
Encouraging Corporate Governance: Reverse book building promotes better corporate governance. It ensures companies are accountable to their shareholders and follow fair practices in significant decisions like delisting or share buybacks, building investor confidence.
Enhanced Shareholder Participation: It encourages shareholders to actively participate in corporate decisions, allowing them to express their valuation expectations and ensuring their interests are considered.
Preventing Arbitrage and Market Abuse: The standardized process helps prevent market abuse and arbitrage opportunities that could arise from traditional buybacks or delistings, minimizing unfair advantages.
Adapting to Global Best Practices: SEBI’s approach aligns with global best practices, making the Indian capital markets more attractive to global investors.