How Final Price Of A Delisting Is Decided?

  • Stock Market Analysis

The final price of delisting cannot be decided by the acquirer alone!!

There is an open process through which the final delisting price is calculated and decided. And this process is known as Reverse Book Building (RBB).

The Reverse Book Building is basically a process used for efficient price discovery. You can take it as a mechanism provided for capturing the sell orders on an online basis from the shareholders. When the Reverse Book Building is started, offers are collected from the shareholders at various prices, which are above or equal to the floor price.

Using Reverse Book Building, after offers from shareholders have been received, a price is then identified by evaluating received offers where Acquirer can delist its shares.

During the Reverse Book Building process, Shareholders are free to decide the price at which they want to give their shares back to the company. They can offer their shares at Rs 100 also and Rs 1000 also. The only restriction shareholders will have to follow is that they can't offer their shares below the Floor price. So, the offer price could be equal to floor price or higher than it.

For successful delisting, the acquirer is required to buy at least that amount of shares from public shareholders which if added to the existing holding of the acquirer, will exceed 90 percent of the total shares issued by the company!

The price upto which the acquirer will be able to achieve this percentage will be announced as the final delisting price.

Without 90 percent+ holding of the acquirer, the delisting process will not be considered as successful and therefore, shares of the company will continue to trade on the exchanges.

That's is how the final delisting price is calculated!!!!!!

Suppose there is an ABC company that has a total of 100 shares.

Out of these 100 shares, promoter of the company holds 50 shares, 3 institutional investors hold 12 shares each (total 36 shares), and small and retail shareholders (individual investors) hold the remaining 14 shares.

shareholding pattern abc company

Because of some reasons, the promoter of the company now wants to delist its shares from exchanges. To successfully delist shares, the promoter is required to hold 90+ percent of shares of total shares issued by the company.

So, to achieve this holding percentage, the promoter will initially announce a floor price where he is ready to purchase all the shares of public shareholders.

(We have already discussed what is floor price above. Therefore, I will not discuss it here)

After that, the company is required to complete all necessary formalities prescribed by SEBI, before the Reverse Book Building process could be started.

In our example, to successfully delist the shares from exchanges, the promoter will be required to acquire 41 shares from public shareholders.

By acquiring 41 shares, the promoter will have total of 91 shares (50 shares existing holding + 41 new shares purchased from public = 91 shares).

As the company has a total of 100 shares, every single share will represent 1 percent shares of the company.

So, by having 91 shares, the promoter will hold 91 percent shares of total shares issued by the company. This percentage will easily exceed 90 percent criteria set by SEBI.

Therefore, by having 91 shares, the promoter will be able to delist its shares.

But wait a minute!!!!!

Institutional investors are not going to return back their shares so easily!

The promoter will have to discuss a lot with institutional investors on which share price these investors will release their shares.

During Delisting, Institutional investors would not give their shares until some good price is not offered to them. So, the promoter will need to negotiate on this matter with Institutional investors.

Why Institutional Investors are so important for Promoter? In our example, without shares held by institutional investors, the promoter will not be able to meet 90 percent criteria even if all retail shareholders return back their shares during reverse book building.

In ABC company, retail shareholders hold only 14 shares and promoter holds 50 shares.

So, even if promoter's shares and retail shareholders share are combined, total shares will be only 64 shares or 64 percent shares (as the company has a total of 100 shares, every single share will represent 1 percent shares of a company).

This will be much below 90 percent criteria.

Therefore, the promoter will have to make some deal with institutional investors!!

Eventually, after putting a lot of minds, 2 institutional investors are now ready to give up their shares at Rs 150 and the third one is ready to give up their shares at 180 rupees.

After this discussion with investors, the Reverse book building process officially started and most of the public shareholders submitted their respective bids.

Thereafter, it was started to find out at what prices small shareholders are ready to sell their shares.

It was discovered that 4 shares have been offered at Rs 160, 1 share has been offered at Rs 170, and the remaining 9 shares have been offered at Rs 200, by retail shareholders. Two Institutional investors have offered their shares at Rs 150 and the other one has offered its shares at Rs 180 (as per what was discussed before).

To conclude, here is how and where different public shareholders have offered their shares during reverse book building.

how shares are offered

As the promoter is required to buy 41 shares to meet the 90% criteria, he will start its acquisition of shares from those which have been offered at the lowest price.

He will first take 24 shares offered by 2 institutional investors at Rs 150.

After that, he will move forward and take the offer of 4 shares, which have been offered at Rs 160.

Till now, 28 shares have been collected.

Thereafter, the promoter will move further and take the offer of 1 share offered at Rs 170. After this offer, the promoter will take the offer of 12 shares offered by 3rd institutional investor at Rs 180.

Till now, 28+13=41 shares have been collected.

Now the promoter will move further higher and.........

Wait a minute!!!!!!!!

The promoter was required to buy 41 shares to make delisting successful!!

And by accepting offers available upto Rs 180, he is getting 41 shares!

So, because upto share price of Rs 180, the promoter can acquire the required shares, the price of Rs 180 will be announced as the final delisting price.

Cheers

Drop an image here or Supported formats: *.jpg, *.png, *.gif up to 5mb

Error: File type not supported

Drop an image here or

100
  • deendayal sarawgi @deendayal sarawgi
    nicely explained.
    Like 1
  • Sanjay Kumar @Sanjay Kumar
    Nicely written.
    Like 1
  • Manish Gupta @Manish Gupta
    let's hope it works so actually anyway nicely written:)
    Like 1
  • Mangesh Chouhan @Mangesh Chouhan
    well explained...cleared my lot of doubts
    Like 1
  • B B Susheel Kumar @B B Susheel Kumar
    nice article!! well explained!!
    Like 1
  • RDX Original @RDX Original
    Nice Article
    Like 1
  • JITENDRA SINGH @JITENDRA SINGH
    Excellent information for retail investors. please mention if some retail investor don't respond to the offer and continue to hold his share. what will be the disposal?
    Like 2
  • gitesh shah @gitesh shah
    excellent
    Like 1
  • Pradip Routh @Pradip Routh
    very well explained... nice article
    Like 1
  • Sourabh Kashyap @Sourabh Kashyap
    👏👍👌
    Like 1
  • Rudra Singh @Rudra Singh
    fully understood 👍nice Article
    Like 3
  • salim shaikh @salim shaikh
    nice
    Like 1
  • Sj Roy @Sj Roy
    thanks for crystal clear write up.
    Like 5

Related Articles