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BOOK BUILDING Book Building is a process by which corporates determine the demand and the price of a proposed issue

of securities through public bidding. The objective is to determine the quantum of the issue on the basis of the price book built. Once the price and the quantum of issue has been determined by the issuer, the issue may either be offered under the private placement of the public offer category, or both, as per the requirement of the SEBI regulations. Characteristics: A new buzzword in the capital markets is book building. This esoteric, gobbledygook investment banker jargon is basically used for raising funds through the issue of securities. Being an alternative to conventional avenues it has created a lot of interest in the financial market. But what is it all about? Definition The process refers to the collection of bids from investors. The issue price is fixed after the bid closing date based on the price at which bids were made. This procedure of raising funds from the equity capital market is novel to India. In light of this, the Securities and Exchange Board of India (SEBI) in its guidelines had stipulated a price band mechanism, which has now been replaced to a floor price mechanism. This stipulation is basically to provide an indicative price for the markets to help facilitate them in coping with a new system of capital raising and in price discovery. At a later date we could even see the removal of the floor price mechanism. Book building is seen as an alternative to a fixed price issue mechanism. The parties to the issue include the Company (Issuer), Book running lead manager (BRLM), other syndicate members, underwriters, institutional and individuals investors. Tendering Process Book building involves inviting subscriptions to a public offer of securities, essentially through a tendering process. Eligible investors are required to place their bids for the number of shares to be issued and the price at which they are willing to invest, with the lead manager running the book. At the end of the cut off period, the lead manager determines the response to the issue in terms of the quantum of shares and the highest price at which demand is sufficient to match the size of the issue. Floor Price: Floor price is the minimum price set by the lead manager in consultation with the issuer. This is the price at which the issue is open for subscription. Investors are free to place a bid at any price higher than the floor price. Price Band: The range of price (the highest and the lowest price) at which offer for the subscription of securities is made is known as ‘price band’. Investors are free to bid any price within in the price band. Bid: The investor can place a bid with the authorized lead manager merchant banker. In the case of equity shares, usually several brokers in the stock exchange are also authorized by the lead manager. The investor fills up a bid-cum-application form, which gives a choice to bid for up to three optional prices. The price and demand options submitted by the bidder are treated as optional demands and are not cumulated. Allotment: The lead manager, in consultation with the issuer, decides the price at which the issue will be subscribed and proceeds to allot shares to investors who have bid at or above the fixed price. All investors are

the book runner aggregates the subscription so received. For any allottee. therefore the price would be equal to or less than the price bid. 3) Draft prospectus: A draft prospectus containing all the information except price of the issue must be filed wit the SEBI. The prospectus is to be filed with the ROC within two days of the issue price being finalized. as SEBI guidelines for the latter option are still unclear. The following steps are involved in this process: 1) Eligibility: All corporates eligible for public shares are also eligible for raising capital through the book building process. The book runner circulates a copy of the draft prospectus among the institutional buyers who are eligible for firm allotment and to the intermediaries who are eligible to act as underwriters. However. including individuals. all investors. as in the case of government securities. inviting them to subscribe to the issue of securities. which mentioned in the prospectus. Type of Book Building The issue of securities through book building can be either through:  75% book building  100% book building However. The book runner maintains a record of the names and number of securities ordered by intermediary buyers and the price at which they are willing to subscribe the issue under the placement portion. a price band indicating the price range within which securities are being offered for subscription should be indicated. eligible to invest in a particular issue of securities can participate in the book building process. Process 75% Book Building Under this type of public offer. The Process: The procedures relating to the book building process depend on the level at which it is to be taken up by a corporate entity. The balance securities must be stated as net offer to the public category. there are two options available to a company either 75 percent or 100 percent book building process. the securities to be used should be separately earmarked as the placement portion category in the prospectus.allotted shares at the same fixed price. Each of these methods is discussed briefly below: 75 percent Book Building: The 75 percent book building option of securities is offered on a firm basis where a minimum of 25 percent of the securities is offered to the public. The book runner collects information about the subscriptions received from underwriters and other intermediaries. only those eligible can participate. According to the SEBI. Although no precise mention is made. if the issue is restricted to qualified institutional. the issue of securities has to be categorised into:  Placement portion category  Net offer to the public . 2) Earmarking securities: Where a decision is taken by a corporate to issue shares through the book building process. Participants: Generally. After a stipulated time period. most companies opt for 75% book building. 4) Appointment of book runner: The issuing company appoints a merchant banker as the book runner. then. The underwriters are required to make a payment of the total amount for the subscription of issues.

100 Percent Book Building It is an option book building process where by 100 percent of the securities is offered on a firm basis or is reserved for promoters. This will be entitled to only those who have opted for this facility in the bid offer form. A draft prospectus is to be filed with SEBI. This document contains all the required disclosures. 4) Eligible merchant bankers shall be appointed as the lead book runners and their names shall be mentioned in the draft prospectus to be filed with the SEBI. they are also responsible for maintenance of records relating to the book building process. to permanent employees of the issuer company. Lead book runner: An essential requirement for a 100 percent book building process is the appointment of a lead book runner by the issuer. The required minimum issue of capital is Rs 25 crores. In the event of any under subscription of issue. The book runner is primarily responsible for book building in order to determine the appropriate price and quantum of issue. Essential disclosures: The following information should be disclosed in the draft prospectus before being filed with SEBI: . The information about the issue price and the quantum issue need not be mentioned. Preference will be given to individuals. a syndicate is formed. and in the case of new companies. The issue price for the placement portion and offer to the public has to be the same. The prospectus shall mention an indicative price at which the securities will be offered. 3) Allotment can also be made either on a competitive basis or on firm allotment basis to the shareholders of the promoting companies in the case of a new company. such as the total size of the issue etc in accordance with SEBI norms. The vice-versa case is also permissible. After the final Draft Offer Document (DOD) is ready the issuer is to place advertisements for the issue in at least:  One national English daily  One national Hindi daily  One regional language daily in the town/city of the registered office The advertisement should also mention the bid opening and closing date. which may be inspected by SEBI to examine the modalities of book building adopted by the company. permanent employees of the issuer company. In addition. The net offer to the public is to be made post book building within a maximum period of 15 days. or to the shareholders of group companies in the case of existing companies.e. It may also be offered to shareholders either on a competitive basis or on a firm allotment basis. In the case of under subscription in the ‘net offer to the public’. the lead merchant bankers have to fill the shortfall. Draft prospectus: The lead book runner files a draft prospectus with SEBI. SEBI registered underwriters and other eligible merchant bankers are appointed by the book runner as members of the syndicate. Any modifications are intimated to the company by SEBI within a period of 21 days after the receipt of the draft prospectus. The book runners are responsible for incorporating any changes in the draft prospectus that might be suggested by SEBI. Any modifications made by SEBI will have to be incorporated and the responsibility for the same is that of the book runner. Following are the procedures connected with the 100 percent book building process: Conditions: It is possible for an issuer to make a public issue through the 100 percent book building process by fulfilling the following conditions: 1) The minimum capital to be raised must be Rs 25 crores 2) Reservation or firm allotment to promoters can be made only according to the guidelines of the SEBI i. spill over from the ‘placement portion’ will be permitted.Book building is an alternative to fixed price mechanism to the extent that is not reserved for the fixed price issue. For this purpose. to the permanent employees of the promoting company.

Stock brokers: SEBI registered stock brokers are appointed for placing orders with the company by the stock exchange that would act as collection centers for the applications. . IT is incumbent on the part of the issuing company to offer at least 10 percent of the total issue to the public. 1999. Book Running Lead Manager The lead merchant bankers appointed by the Issuer Company are referred to as the Book Running Lead Managers. The ratios have to be computed after computed after giving due effect to the consequent increase of capital on account of compulsory outstanding conversions 5) Details of NAV per share based on the last balance sheet. Syndicate Members are intermediaries registered with SEBI who also carry on the activity of underwriting. Bidder The person who has placed a bid in the Book Building process. The Issuer Company in consultation with the Book Running Lead Managers fixes the floor price. Syndicate Members The Book Running Lead Managers to the issue appoint the Syndicate Members. P/E. Merchant Banker An entity registered under the Securities and Exchange Board of India (Merchant Bankers) Regulations. Floor Price The minimum offer price below which bids can not be entered. The advertisement contains all the requisite features of the final offer document as specified under the provisions (Section 2A) of the Companies Act. Order Book It is an 'electronic book' that shows the demand for the shares of the company at various prices on a real time basis. 3) Details of basis of ascertainment of issue price by the issuer and the book runner 4) Details of a accounting ratios. These brokers must be capable of taking up the issue in the event of failure on the part of their clients to honor their commitment. The two main components of a bid are the price and the quantity. after obtaining the revised prospectus from SEBI. The names of the Book Running Lead Managers are mentioned in the offer document of the Issuer Company. The issuer pays commission for their services. such as pre-issue EPS. an average return on net worth etc for three years including a comparison with industry average.1) Details of the members of the syndicate formed by the lead book runner for the purpose of bidding for the issue. Advertisement: The issuer. 2) Details of registrars and bankers to the issue. Bid A bid is the demand for a security on behalf of an investor that is entered by the syndicate/sub-syndicate members in the system. who enter the bids of investors in the book building system. advertises in leading newspaper.