Bookbuilding

What is Bookbuilding?

Bookbuilding 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 Bookbuilding Works?

• Appointment of Merchant Bankers: Companies appoint merchant bankers or bookrunners to manage the bookbuilding process.
• Price Band Announcement: The price band is announced so that the available investors know the actual price range to be offered
• Bidding Process: Investors submit orders specifying the quantum of shares being applied for, and the applicable price within this price band;
• Book Creation: The orders of the investors go into an e-book, clubbing demand into different price categories
• Price Determination: Determined by equating demand and supply.
• Share Allotment: Shares are allotted to investors usually on a pro-rata basis as per the final issue price.

Bookbuilding: Key Characteristics

1. Price Discovery: Unlike fixed price offerings, bookbuilding 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 Bookbuilding

1. 100% Bookbuilding: The entire issue is offered through the bookbuilding process.
2. 75% Bookbuilding: A part of the issue is sold through bookbuilding, and the rest is sold at a fixed price.

Advantages of Bookbuilding

1. Effective Pricing: It helps companies to achieve the best price in the market.
2. Higher Participation: It attracts a large number of investors, including institutional and retail participants.
3. Faster Process: It makes the IPO process faster than the traditional method.

Limitations of Bookbuilding

• Complexity: The process involves much coordination and expertise.
• Market Volatility: The short-term market conditions can affect the price discovery.
• Cost: There is a higher cost as it involves multiple intermediaries.

Bookbuilding in India

Bookbuilding 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.

• Price Band: In most cases, a 20% band is kept on the upper and lower side.
• Bid Lot: The investors can submit their bids in multiples of the lot size specified.

Bookbuilding 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 Bookbuilding is Important?

Bookbuilding 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.