What is Reverse Book Building in Stock Market?

Reverse Book Building is a process which is used to delist a company's shares from the stock exchange. It relates to the price at which a company that wants to delist from the stock exchange, proposes to buy back shares from its public shareholders.

Key Features of Reverse Book Building

• Initiated by Company: The company initiates the reverse book building process. It is majorly done when a company plans to turn private, reduce the number of shareholders, or delist its shares from the stock exchange.
• Shareholder-driven: In this process, the shareholders propose the price at which they are willing to sell their shares.
• Final Price Determination: The final price is determined on the basis of the bids received from the shareholders.

Detailed Explanation of Reverse Book Building

1. Announcement by the Company

The company announces to its shareholders its intention to delist its shares from the stock exchange. It specifies the floor price, i.e., the minimum price at which it is willing to repurchase the shares.

2. Bidding Process

Shareholders submit their bids to the company, indicating the number of shares they wish to sell and at what price.

3. Discovery of Final Price

All the bids are arranged in descending order, and the price at which the total number of shared bid equals the number of shares the company needs to repurchase is the final price.

4. Share BuyBack

Final price is communicated to the shareholders, and the company buys back shares from them at this price.

Real Life Example of Reverse Book Building

Let's take an example of Essar Oil Limited, an Indian company listed on the Bombay Stock Exchange (BSE). In 2015, the company decided to delist its shares. The promoters offered a floor price of ₹108. But, due to strong demand, investors bid at ₹262.80 per share, pushing the floor price up. Thus, the example demonstrates how the reverse book building process leads to the discovery of the right price for delisting the shares.

Points to Remember

• The process is transparent and gives small investors an equal opportunity to offer their shares.
• As the offer price is decided by the shareholders, it generally ends up being higher than the market price of the shares.

Conclusion

Reverse book building is a mechanical, fair process used for delisting shares from the stock exchange. It is an efficient avenue for shareholders to exit the company and for promoters to consolidate their holdings.

Further Read: 1. Essar Oil delisting saga