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
allotted shares at the same fixed price. For any allottee, therefore the price would be equal to or less than
the price bid.
Participants:
Generally, all investors, including individuals, eligible to invest in a particular issue of securities can
participate in the book building process. However, if the issue is restricted to qualified institutional, as in
the case of government securities, then, only those eligible can participate.

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. According to the SEBI, there are two options available to a company either 75 percent or
100 percent book building process. 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 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.
2) Earmarking securities: Where a decision is taken by a corporate to issue shares through the book
building process, the securities to be used should be separately earmarked as the placement portion
category in the prospectus. The balance securities must be stated as net offer to the public category.
3) Draft prospectus: A draft prospectus containing all the information except price of the issue must be
filed wit the SEBI. Although no precise mention is made, a price band indicating the price range within
which securities are being offered for subscription should be indicated. The prospectus is to be filed with
the ROC within two days of the issue price being finalized.
4) Appointment of book runner: The issuing company appoints a merchant banker as the book runner,
which mentioned in the prospectus. 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, inviting them to subscribe to the issue of securities. 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. The book runner collects information about the
subscriptions received from underwriters and other intermediaries. After a stipulated time period, the
book runner aggregates the subscription so received. The underwriters are required to make a payment of
the total amount for the subscription of issues.

Type of Book Building

The issue of securities through book building can be either through:
● 75% book building
● 100% book building
However, most companies opt for 75% book building, as SEBI guidelines for the latter option are still
unclear.

Process
75% Book Building 
Under this type of public offer, the issue of securities has to be categorised into:
● Placement portion category
● Net offer to the public
Book building is an alternative to fixed price mechanism to the extent that is not reserved for the fixed
price issue.
A draft prospectus is to be filed with SEBI. The prospectus shall mention an indicative price at which the
securities will be offered. Any modifications made by SEBI will have to be incorporated and the
responsibility for the same is that of the book runner. 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. The issue price for the
placement portion and offer to the public has to be the same. The net offer to the public is to be made post
book building within a maximum period of 15 days.
In the case of under subscription in the ‘net offer to the public’, spill over from the ‘placement portion’
will be permitted. This will be entitled to only those who have opted for this facility in the bid offer form.
Preference will be given to individuals. The vice-versa case is also permissible.

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, permanent employees of the issuer company. It may also be offered to
shareholders either on a competitive basis or on a firm allotment basis. The required minimum issue of
capital is Rs 25 crores.
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.e. to permanent employees of the issuer company, and in the case of new companies, to the permanent
employees of the promoting company.
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, or to the shareholders of group companies in
the case of existing companies.
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.
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 book runner is primarily responsible for book building in order to
determine the appropriate price and quantum of issue. For this purpose, a syndicate is formed. SEBI
registered underwriters and other eligible merchant bankers are appointed by the book runner as members
of the syndicate. In the event of any under subscription of issue, the lead merchant bankers have to fill the
shortfall. The book runners are responsible for incorporating any changes in the draft prospectus that
might be suggested by SEBI.
In addition, they are also responsible for maintenance of records relating to the book building process,
which may be inspected by SEBI to examine the modalities of book building adopted by the company.
Draft prospectus: The lead book runner files a draft prospectus with SEBI. This document contains all the
required disclosures, such as the total size of the issue etc in accordance with SEBI norms. The
information about the issue price and the quantum issue need not be mentioned. Any modifications are
intimated to the company by SEBI within a period of 21 days after the receipt of the draft prospectus.
Essential disclosures: The following information should be disclosed in the draft prospectus before being
filed with SEBI:
1) Details of the members of the syndicate formed by the lead book runner for the purpose of bidding for
the issue.
2) Details of registrars and bankers to the issue.
3) Details of basis of ascertainment of issue price by the issuer and the book runner
4) Details of a accounting ratios, such as pre-issue EPS, P/E, an average return on net worth etc for three
years including a comparison with industry average. 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.
Advertisement: The issuer, after obtaining the revised prospectus from SEBI, advertises in leading
newspaper. The advertisement contains all the requisite features of the final offer document as specified
under the provisions (Section 2A) of the Companies Act. IT is incumbent on the part of the issuing
company to offer at least 10 percent of the total issue to the public.
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. 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 issuer
pays commission for their services.
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. The two main components of a bid are the price and the quantity. 

Bidder 
The person who has placed a bid in the Book Building process. 

Book Running Lead Manager 

The lead merchant bankers appointed by the Issuer Company are referred to as the Book Running Lead
Managers. The names of the Book Running Lead Managers are mentioned in the offer document of the
Issuer Company. 

Floor Price 
The minimum offer price below which bids can not be entered. The Issuer Company in consultation with
the Book Running Lead Managers fixes the floor price. 

Merchant Banker 
An entity registered under the Securities and Exchange Board of India (Merchant Bankers) Regulations,
1999. 

Syndicate Members 
The Book Running Lead Managers to the issue appoint the Syndicate Members, who enter the bids of
investors in the book building system. Syndicate Members are intermediaries registered with SEBI who
also carry on the activity of underwriting. 

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.