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Book Building

Book Building

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676The Chartered AccountantNovember 2005
THEME
BOOK-BUILDING PROCESS: AN EFFICIENTMECHANISM FOR MANAGEMENT OFMEGA PUBLIC ISSUES IN INDIA
 T
he stoc maret hasbeen acnowledgedall over the world as vital or long-term economicgrowth. Several empiri-cal studies have proved thatthere is a strong positive cor-relation between the level o sophistication o a country’sstoc maret and its level o economic growth and de- velopment. Countries with well-developed stoc mar-ets generally tend to enjoy higher economic growth anddevelopment than those withunderdeveloped stoc mar-ets (Fran). There was a vitalneed to strengthen the capitalmaret, which could only beachieved through structuralmodications, introducingnew maret mechanism, in-struments, and by taing stepsor saeguarding the interesto the investors through moredisclosures and transparency.In this context, an importantmechanism named as Boo-Building in the system o Ini-tial Public Oerings (IPOs) was introduced by SEBI inIndia on the basis o the rec-ommendations o the com-mittee constituted under thechairmanship o YH Male-gam in October 1995. TheBoo-Building is the mostpractical mechanism or thequic and ecient manage-ment o mega issues
1
(includ-ing oers or sale).
 
Meaning
SEBI guidelines, 1995dened boo-building as“a process undertaen by  which a demand or the se-curities proposed to be issuedby a body o corporate is elic-ited and built up and the priceor such securities is assessedor the determination o thequantum o such securities tobe issued by means o a notice,circular, advertisement, docu-
*The author is Convener  ICET 2005, Professor of Commerce and Business Management, KakatiyaUniversity, Warangal.**The author is a faculty  Member and Research Scholar of Department of Commerce and Business Management, University  Arts & Science College inWarangal.
Dr. V. Gangadhar
*
 The boo-building system is part o Initial Public Oer(IPO) o Indian Capital Maret. It was introduced by SEBIon recommendations o Mr. Y.H. Malegam in October 1995.It is most practical, ast and ecient management o MegaIssues. Boo Building involves sale o securities to the publicand the institutional bidders on the basis o predeterminedprice range. It is an innovative method o mareting securi-ties involving price determination and quantum o securitieson the basis o the demand rom the prospective sharehold-ers. In this process the SEBI (Maret Regulator) has issued various guidelines or control and regulation o boo-buildingprocess. Since, inception o boo-building process in India,Share o Mega Issues in total capital mobilised has increasedrom 60.1 per cent in 1994-95 to 92.3 per cent in 2003-04.ment or inormation memo-randa or oer document”.In general, the word “Boo-building” is a method o mar-eting the shares o a com-pany whereby the quantumand the price o the securitiesto be issued will be decided onthe basis o the ‘bids’ receivedrom the prospective share-holders by the lead merchantbaners. According to thismethod, share prices are de-termined on the basis o realdemand or the shares at vari-ous price levels in the maret.
Objectives
The main objectives o this article are as ollows:1. To understand the con-ceptual ramewor o Boo-Building.2. To study the regulatory guidelines o SEBI orBoo-Building Issues.3. To examine the recent de- velopments in the Boo-Building Process.4. To analyse the Trends inthe Boo-Building Issuesin India.
Malegam Panel’sRecommendations:
The introduction o boo-building in India in1995 was on account o therecommendations o an ex-pert committee appointed by SEBI under Chairmanshipo YH Malegam “to review the (then) existing disclosurerequirements in oer docu-ments.” Two o the terms o reerence being “the basis o 
1
Mega Issue is an Initial Public Oer with a capital oered to public exceeds more than Rs. 100 crore.
G. Naresh Reddy
**
 
The Chartered Accountant 677November 2005
pricing the issue” and “wheth-er substantial reduction waspossible in the time taen orprocessing applications by SEBI.” The committee hassubmitted its report with sev-eral recommendations andthe SEBI accepted the samein November 1995. The boo-building route should be opento issuer companies, subject tocertain terms and conditions.Some o them are presentedbelow:1. The option should beavailable only to issues ex-ceeding Rs. 100 crore;2. The boo-building issuercompanies could eitherreserve the securities orrm allotment or availthemselves o the boo-building process;3. Drat prospectus to besubmitted to SEBI couldexclude inormationabout the oer price;4. A boo runner to benominated rom amongthe lead merchant ban-ers, charged with specicresponsibilities and thename is to be submittedto the SEBI’s approval;and5. The requirement o 25percent o the securitiesto be oered to the public will be continued. There have been sev-eral amendments/revisionsto the above guidelines; therst one in December 1996made available the option o boo-building to all corporatebodies which were otherwiseeligible to mae an issue o capital to the public, and incase o under subscription, thespill-over rom the public por-tion could be permitted to theplacement area and vice-versa.In 1997, the restriction o theacility to 75 percent o theissue was thought to severely constrain the benets aris-ing out o price and demanddiscovery, and the acility wasextended to 100 percent o theissue, available only i the is-sue amount was Rs. 100 croreand above, compulsorily oer-ing an additional 10 percento the issue sise to the publicthrough prospectus, and re-serving at least 15 percent o the issue size to individualinvestors applying up to tentradable lots. Further, auditednancial ratios had to be dis-closed, namely, EPS, P/E, av-erage return on net worth orthe last three years and netasset value based on last year’sbalance sheet.However, there were notaers or the 100 percentboo-building acility. Basedon suggestions made by lead-ing merchant baners, theollowing amendments weremade to the guidelines in1999:1. The issuer may be allowedto disclose either the is-sue size or the number o securities to be oered tothe public;2. Allotment should be indemat mode only; and3. Reservation o 15 percento issue amount or indi- vidual investors need tothe public at a xed price.Some o the earliest megaissues through the boo-building route were thoseo Larsen & Toubro, ICI-CI, Tisco and others.
SEBI Guidelines:
1. In January 2000, SEBIhas issued a compen-dium o guidelines, cir-culars and instructionsto merchant baners re-lating to issue o capital,including those on theboo-building mecha-nism. The compendiumincludes a model timerame or boo-building:“Ater the price has beendetermined on the ba-sis o bidding, statutory public advertisements ora continuous three dayscontaining, inter alia, theprice as well as a tableshowing the number o securities and the amountpayable by an investor,based on the price deter-mined, shall be issued andthe interval between theadvertisement and issueopening date should be aminimum o ve days.”2. The drat prospectus tobe circulated has to indi-cate the price band within which the securities arebeing oered or sub-scription. The bids haveto be within the pricebands. Bidding is permis-sible only i an electroni-cally-lined transparentacility is used. An issu-ing company can also xa minimum bid size. Aninitial bid can be changedbeore the nal rate isdetermined. The megaissues such as PetronetLNG and Biocon weresuccessully launchedthrough the 100 percentboo-building route.3. The Prospective bidders were advised to read the“Red herring prospec-tus” careully. Accordingto the Act, a “Red her-ring prospectus” meansa prospectus that doesnot have complete par-ticulars on the price andthe quantum o securi-ties oered. The ConciseOxord Dictionary givesthe meaning o ‘red her-ring’ as a misleading clueor distraction, so namedrom the practice o usingthe scent o red herring intraining hands.4. The year 2000, Amend-ment to the Act gave legalcloa to the boo-build-ing route by allowing cir-culation o the inorma-tion memorandum andthe red herring prospec-
 
678The Chartered AccountantNovember 2005
tus. According to the Act,a process is to be under-taen prior to the lingo a prospectus by whicha demand or the securi-ties proposed to be issuedby a company is elicited,the price and the terms o the issue o such securi-ties are assessed by meanso a notice, circular, ad- vertisement or document.Incidentally, the woringgroup on the Compre-hensive Companies Bill,1997 (since lapsed) hadadvocated introductiono boo-building. It de-ned the term as “an in-ternational practice thatreers to collecting ordersrom investment banersand large investors basedon an indicative pricerange. In capital marets, with sucient width anddepth, such a pre-issueexercise oten allows theissue to get a better ideao the demand and thenal oer price o an in-tended public oer.”5. SEBI (Disclosure and In- vestor Protection) Guide-lines, 2000 contains pro- visions or boo buildingunder chapter XI thatincludes guidelines or75 per cent boo-build-ing process, 100 per centboo-building process,disclosure requirements,allocation/allotment pro-cedure and maintenanceo boos and records.
Types of Book-BuildingProcess:
 The Companies are boundto adhere to the SEBI’s guide-lines or boo building oersin the ollowing manner:
1. 75 per cent Book-Building Process:
Under this process 25per cent o the issue is to besold at a xed price and thebalance o 75 per cent throughthe Boo Building process.Chart-1 indicates this pro-cess.
 2. Offer to Public through Book-Building Process:
The process species thatan issuer company may maean issue o securities to thepublic through prospectus inthe ollowing manner:a. 100 per cent o the net o-er to the public throughboo building process,orb. 75 per cent o the net o-er to the public throughboo building processand 25 per cent o thenet oer to the public at aprice determined throughboo building process.(Please reer to Chart 2& 3 on the next page).CHART-1: 75 PER CENT BOOk-BUILDING PROCESS
Recent Changes in Book-Building Mechanism:
 The Securities and Ex-change Board o India onMarch 29, 2005 announcedsweeping changes in the IPOnorms. They are as ollows:1. Increased allocation orretail investors in boo-built issue rom 25 percent to 35 per cent andhas also changed the de-nition o the retail cat-egory.2. The maret regulator hasnow permitted retail in- vestors to apply or Rs. 1lah worth o shares in aboo-built issue againstRs. 50,000 earlier. Forthis purpose, SEBI hasredened the retail in-dividual investor as one who applies or bids orsecurities o or or a valuenot exceeding Rs. 1 lah.3. It has reduced the non-institutional category,popularly nown as highnet worth individuals(HNI), allocation rom 25per cent to 15 per cent.4. Institutional investorsinclude oreign nancialinstitutions (FII) bans,mutual unds and Indiannancial institutions lieLIC or IDBI.5. The changes have beenmade in the SEBI (DIP)Guidelines, 2000 on the

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