Book Building process is an interactive process. It is the process of price discovery, i.e. there is no predetermined price for the shares. As an alternative, the firm issuing the shares declares a price band. When a firm is offering shares to the public via book building process, it sets a price band that defines the minimum and maximum price limits at which investors can make bids for acquiring the shares of the company. The floor price signals the minimum price at which the investors may bid for the shares, cap is the maximum price at which investors can make bids. Bids are then offered for the shares. Each investor states how many shares he wants and what he is willing to pay for those shares (depending on the price band). The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.
Jul 29 2014 11:07 AM
1. The issuer who sets up an IPO will elect a lead merchant banker as a “Book Runner”.
2. The issuer spells out the no. of securities that are to be issued and also the price band for orders.
3. The issuer also nominates associate members with whom investors can place orders.
4. Investors make their order with an associate member who keys in the orders in the “electronic book”. The process is called “Bidding” and is akin to an open auction.
5. A book must stay open for at least 5 days.
6. One can’t submit bids that are lower than the floor price.
7. Bids can be altered by the bidder prior to the closure of the issue.
8. On the completion of the book building phase, the book runner assesses the bids on the basis of the following criteria:- Price Aggression, Investor Quality, Earliness
9. The book runner as well as the firm determines the final price at which it is keen to issue the stock and allocate securities.
10. Normally, the number of shares is fixed; the issue size gets frozen depending on the price per share discovered via the book building process.
11. Allocation of securities shall be made to the successful bidders. Allotment, in simple words, is the mechanism wherein those who apply are given shares.
Retail Investors and high net worth individuals receive allotments on a proportional basis.
Suppose that you are a retail investor and have applied for 1000 shares in the issue, and the issue is oversubscribed 10 times in the retail category, you qualify to get 100 shares. (1000 shares/10).
At times, the over subscription is very large or may be the issue is priced so high that you can’t really bid for too many shares the Rs. 50,000 threshold is reached.
In that case, allotment shall be made on basis of lottery.
1. The price of an instrument is set in much more realistic fashion.
2. The primary aim of book building process is to fix the highest market price for shares and securities.
3. As investors have a voice in the pricing of the issue, they have a greater certainty of being allotted what they demand.
4. The issue price is determined by the market. As there is a distant possibility of the market price of share falling lower than issue price, investor is less likely to suffer from erosion of his investment on listing.
1. Book building is suitable only for mega issues.
2. The issuer firm must be fundamentally strong and well known to the investors.
3. The book building system functions very well in matured market conditions. So, the investors are knowledgeable of the various parameters influencing the market price of the securities. But, such conditions are generally not seen in practice.
4. There is a chance of price rigging on listing as promoters shall try to bail out associate members.