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Book Building Process

Book Building Process



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Published by mukesha.kr
Book Building Process is a common practice used in by most of the companies for marketing a public offer of equity shares of a company.
This pdf describes about the book-building process.
Book Building Process is a common practice used in by most of the companies for marketing a public offer of equity shares of a company.
This pdf describes about the book-building process.

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Categories:Types, Research
Published by: mukesha.kr on Sep 06, 2008
Copyright:Attribution Non-commercial


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Book BuildingBook BuildingBook BuildingBook BuildingProcessProcessProcessProcess
Mukesh Kr. Singh
To keep pace with the globalization and liberalization process, the government of Indiawas very keen to bring the capital market in line with international practices throughgradual deregulation of the economy. It led to liberalization of capital market in thecountry with more expectations from primary market to meet the growing needs for fundsfor investment in trade and industry. Therefore, there was a vital need to strengthen thecapital market which, it felt, could only be achieved through structural modifications,introducing new mechanism and instruments, and by taking steps for safeguarding theinterest of the investors through more disclosures and transparency. As such, an importantmechanism named as Book building in the system of initial public offerings (IPOs) wasrecognized by SEBI in India after having the recommendations of the committee underthe chairmanship of Y. H. Malegam in October, 1995. SEBI guidelines recognized book building as an alternative mechanism of pricing. Under this approach, a portion of theissue is reserved for institutional and corporate investors.SEBI guidelines, 1995 defines book building as “
a process undertaken by which ademand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document 
.”Book building process is a common practice used in most developed countries formarketing a public offer of equity shares of a company. However, book building is atransparent and flexible price discovery method of initial public offerings (IPOs) in whichprice of securities is fixed by the issuer company along with the Book Running LeadManager (BRLM) on the basis of feedback received from investors as well as marketintermediaries during a certain period.
Need of Book Building
The abolition of the Capital Issue Control Act, 1947 has brought a new era in the primarycapital markets in India. Controls over the pricing of the issues, designing and tenure of the capital issues were abolished. The issuers, at present, are free to make the price of theissues. Before establishment of SEBI in 1992, the quality of disclosures in the offerdocuments was very poor. SEBI has also formulated and prescribed stringent disclosurenorms in conformity to global standards. The main drawback of free pricing was theprocess of pricing of issues. The issue price was determined around 60-70 days before theopening of the issue and the issuer had no clear idea about the market perception of theprice determined. The traditional fixed price method of tapping individual investorssuffered from two defects: (a) delays in the IPO process and (b) under-pricing of issue. Infixed price method, public offers do not have any flexibility in terms of price as well asnumber of issues. From experience it can be stated that a majority of the public issuescoming through the fixed price method are either under-priced or over-priced. Individualinvestors (i.e. retail investors), as such, are unable to distinguish good issues from badone. This is because the issuer Company and the merchant banker as lead manager do nothave the exact idea on the fixed pricing of public issues.Thus it is required to find out a new mechanism for fair price discovery and to help theleast informed investors. That’s why, Book Building mechanism, a new process of pricediscovery, has been introduced to overcome this limitation and determine issue priceeffectively. Public offers in fixed price method involve a pre issue cost of 2-3% and carrythe risk of failure if it does not receive 90% of the total subscription. In Book Buildingsuch cost and risks can be avoided because the issuer company can withdraw from themarket if demand for the security does not exist.

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