Book Building
Key Highlights
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Book building is the process in capital markets that helps ascertain the price and demand for securities issued in an IPO or FPO.
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Book building in India is regulated by the Securities and Exchange Board of India (SEBI).
What is Book Building?
Book building is the process in capital markets that helps ascertain the price and demand for securities issued in an IPO or FPO. This dynamic price discovery mechanism is based on the process of inviting bids from institutional and retail investors before finalizing the issue price of the securities.
How Book Building Works?
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Appointment of Merchant Bankers: Companies appoint merchant bankers or bookrunners to manage the book building process.
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Price Band Announcement: The price band is announced so that the available investors know the actual price range to be offered.
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Bidding Process: Investors submit orders specifying the quantum of shares being applied for, and the applicable price within this price band.
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Book Creation: The orders of the investors go into an e-book, clubbing demand into different price categories.
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Price Determination: Determined by equating demand and supply.
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Share Allotment: Shares are allotted to investors usually on a pro-rata basis as per the final issue price.
Key Characteristics of Book Building
1. Price Discovery: Unlike fixed price offerings, book building permits the flexibility in fixing the issue price.
2. Transparency: Facilitates fair price discovery by capturing real-time demand.
3. Market-oriented: Reflects investor sentiment and market conditions during the bidding period.
Types of Book Building
1. 100% Book Building: The entire issue is offered through the book building process.
2. 75% Book Building: A part of the issue is sold through book building, and the rest is sold at a fixed price.
Advantages of Book Building
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Effective Pricing: It helps companies to achieve the best price in the market.
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Higher Participation: It attracts a large number of investors, including institutional and retail participants.
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Faster Process: It makes the IPO process faster than the traditional method.
Limitations of Book Building
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Complexity: The process involves much coordination and expertise.
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Market Volatility: The short-term market conditions can affect the price discovery.
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Cost: There is a higher cost as it involves multiple intermediaries.
Book Building in India
Book building in India is regulated by the Securities and Exchange Board of India (SEBI). It is used for IPOs in the most extensive manner with guidelines to ensure transparency and protection to the investors.
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Price Band: In most cases, a 20% band is kept on the upper and lower side.
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Bid Lot: The investors can submit their bids in multiples of the lot size specified.
Book Building Example
An issuing company determines a price band of ₹100-₹120 per share. The following are the bids submitted by investors:
Investor A: 1,000 shares at ₹120
Investor B: 2,000 shares at ₹110
Investor C: 3,000 shares at ₹100
On the basis of demand, the issuing company decides the issue price within the band, thereby ensuring maximum participation and fair valuation.
Why Book Building is Important?
Book building is a very important tool in modern capital markets. It provides a fair, efficient, and market-driven approach to raising funds. It benefits both issuers and investors by aligning the interests of all stakeholders in the price discovery process.
