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Procedure for IPO & Book Building Introduction To keep pace with the globalization and liberalization process, the

government of India was very keen to bring the capital market in line with international practices through gradual deregulation of the economy. It led to liberalisation of capital market in the country with more expectations from primary market to meet the growing needs for funds for investment in trade and industry. Therefore, there was a vital need to strengthen the capital market which, it felt, could only be achieved through structural modifications, introducing new mechanism and instruments, and by taking steps for safeguarding the interest of the investors through more disclosures and transparency. As such, an important mechanism named as Book building in the system of initial public offerings (IPOs) was recognised by SEBI in India after having the recommendations of the committee under the 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 the issue is reserved for institutional and corporate investors. SEBI guidelines, 1995 defines book building as “a process undertaken by which a demand 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

and is when a company (called the issuer) issues common stock or shares to the public for the first time. Initial purchase offer (IPO) An initial public offering or initial purchase offer (IPO). However. which helps determine what type of security to issue (common or preferred). In an IPO the issuer obtains the assistance of an underwriting firm. but can also be done by large privately owned companies looking to become publicly traded. enters a contract with a lead underwriter to sell its shares to the public. book building is a transparent and flexible price discovery method of initial public offerings (IPOs) in which price of securities is fixed by the issuer company along with the Book Running Lead Manager (BRLM) on the basis of feedback received from investors as well as market intermediaries during a certain period. Procedure IPOs generally involve one or more investment banks known as "underwriters". Common methods include: • Best efforts contract • Firm commitment contract . They are often issued by smaller.used in most developed countries for marketing a public offer of equity shares of a company. The company offering its shares. referred to simply as an "offering" or "flotation". younger companies seeking capital to expand. best offering price and time to bring it to market. The sale (allocation and pricing) of shares in an IPO may take several forms. called the "issuer". The underwriter then approaches investors with offers to sell these shares.

For example. such as the Magic Circle firms of London and the white shoe firms of New York City. may be represented by the main selling syndicate in its domestic market. an issuer based in the E. in addition to separate syndicates or selling groups for US/Canada and for Asia. the underwriters keep a commission based on a percentage of the value of the shares sold (called the gross spread). In cases where the . IPOs typically involve one or more law firms with major practices in securities law. the lead underwriters. Upon selling the shares. Europe. • Multinational IPOs may have many syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions.e. the lead underwriter in the main selling group is also the lead bank in the other selling groups.U. Public offerings are sold to both institutional investors and retail clients of underwriters. Because of the wide array of legal requirements and because it is an expensive process. Usually. take the highest commissions—up to 8% in some cases. i. the underwriters selling the largest proportions of the IPO. Usually. A licensed securities salesperson ( Registered Representative in the USA and Canada ) selling shares of a public offering to his clients is paid a commission from their dealer rather than their client.All-or-none contract • Bought deal • Dutch auction A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter).

The method helps to make a correct evaluation of a company’s potential and the price of its shares. The issuers. are free to make the price of the issues. Investment dealers will often initiate research coverage on companies so their Corporate Finance departments and retail divisions can attract and market new issues. FIIs. Book building acts as scientific method through which a consensus price of IPOs may be determined on the basis of feedback received from most informed investors who are institutional and corporate investors like. UTI. The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the greenshoe or overallotment option Why Book Building? The abolition of the Capital Issue Control Act. In the US sales can only be made through a final prospectus cleared by the Securities and Exchange Commission. 1947 has brought a new era in the primary capital markets in India. the quality of disclosures in the offer documents was very poor. SFCI etc. Before establishment of SEBI in 1992. Controls over the pricing of the issues. at present. LICI.salesperson is the client's advisor it is notable that the financial incentives of the advisor and client are not aligned. GICI. SEBI has also formulated and prescribed stringent disclosure norms in conformity to global standards. designing and tenure of the capital issues were abolished. .

e. The traditional fixed price method of tapping individual investors suffered from two defects: (a) delays in the IPO process and (b) under-pricing of issue. are unable to distinguish good issues from bad one. Thus it is required to find out a new mechanism for fair price discovery and to help the least informed investors. Book Building and Fixed Price Option in the IPOs A company may raise capital in the primary capital market through initial public offers (IPOs). That’s why.The main drawback of free pricing was the process of pricing of issues. In Book Building such cost and risks can be avoided because the issuer company can withdraw from the market if demand for the security does not exist. Book Building mechanism. Public offers in fixed price method involve a pre issue cost of 23% and carry the risk of failure if it does not receive 90% of the total subscription. From experience it can be stated that a majority of the public issues coming through the fixed price method are either under-priced or over-priced. a new process of price discovery. The issue price was determined around 60-70 days before the opening of the issue and the issuer had no clear idea about the market perception of the price determined. IPOs. public offers do not have any flexibility in terms of price as well as number of issues. rights issues and private placement. retail investors). has been introduced to overcome this limitation and determine issue price effectively. as such. In fixed price method. the largest sources of funds in the primary . This is because the issuer Company and the merchant banker as lead manager do not have the exact idea on the fixed pricing of public issues. Individual investors (i.

capital market. they like to participate largely in book built transactions as in this process the costs of public issue and the time taken for the completion of the entire process are much lesser than the fixed price issues. In case of Book Building process book is built by Book Runner Lead Manager (BRLM) to know the everyday demand whereas in case of fixed price of public issues. In Book Building the price is determined on the basis of demand received or at price above or equal to the floor price whereas in fixed price option the price of issues is fixed first and then the securities are offered to the investors. On the other. the demand is known at the close of the issue. allotments of shares to all investors are made on proportionate basis. Institutional investors normally are not interested to participate in fixed price public issues due to uncertainty of allotment and lack of opportunity cost. In fixed price process in IPOs. to the company are basically an invitation by a company to the public to subscribe to its securities offered through prospectus. Steps Involved in Book Building Process: .


95) for optimum price discovery of corporate securities.10. dated 12. Basically. 1998 prescribed the fresh guidelines for book building mechanism after thorough modification and it was again modified in 2001(dated 6.12. a public issue through Book Building route should consist of two portions: (a) The Book Building portion and (b) The fixed price portion.Regulatory Framework: The Book Building guidelines were first introduced by SEBI in 1995 (clarification XIII. from time to time modifies the guidelines in order to upgrading the existing mechanism. The SEBI. the main theme of SEBI guidelines regarding book building can be presented at a glance in the following manner: Offer to public through Book building process The process specifies that an issuer company may make an issue of securities to the public through prospectus in the following manner: . an issuer company proposing to issue capital through book building shall comply with the guidelines prescribed by SEBI.08. The fixed price portion is conducted like normal public issues (conventionally followed earlier) after the book built portion during which the issue price is fixed after the bid closing date.2001) and 2003(dated 14.2003). However. According to the SEBI. The SEBI in its press release dated 7th September.

• 100% of the net offer to the public through book building process. the BRLMs shall be responsible for bringing in the amount involved. If the syndicate members are not able to fulfill their underwritten obligations. 100% of the net offer to the public through100% Book Building process The net offer to the public. or • 75% of the net offer to the public through book building process and 25% of the net offer to the public at the price determined through book building process. The bid remains open for at least five days. The syndicate members are to enter into an underwritten agreement with the BRLMs indicating the number of securities which they would like to subscribe at the predetermined price and BRLMs shall in turn enter into an underwritten agreement with the issuer company. The date of opening as well as closing of the bidding. the names . under this process shall be fully underwritten by the syndicate members/book running lead managers.

To provide license to dealers and brokers : SEBI has power to provide license to dealers and brokers of capital market. One of main example is ULIPs case. " It is just like mutual funds and all banks and financial and insurance companies who want to issue it. If SEBI thinks that it will be against its rules and regulations. SEBI is more strict with those who commit frauds in capital market. Since its establishment in 1992. must take permission from SEBI. SEBI can ban on any stock exchange to trade in shares and stocks.and addresses of BRLMs." . The role of security exchange board of India (SEBI) in regulating Indian capital market is very important because government of India can only open or take decision to open new stock exchange in India after getting advice from SEBI. syndicate members. For example. SEBI is regulator to control Indian capital market. 2. If SEBI sees that any financial product is of capital nature. SEBI said. SEBI fixed the time of trading 9 AM and 5 PM in stock market. then SEBI can also control to that product and its dealers. we explain role of SEBI in regulating Indian Capital Market more deeply with following points: 1. Now. Power to make rules for controlling stock exchange : SEBI has power to make new rules for controlling stock exchange in India. Now. it is doing hard work for protecting the interests of Indian investors. SEBI gets education from past cheating with naive investors of India. bidding terminals for accepting the bids must be mentioned in the advertisement.

Acquisition and Takeover the companies : Many big companies in India want to create monopoly in capital market.forward transactions : Share trading transactions carry forward can not exceed 25% of broker's total transactions.3. SEBI sees whether this merge or acquisition is for development of business or to harm capital market. To make new rules on carry . To Control the Merge. To create relationship with ICAI : ICAI is the authority for making new auditors of companies. 4. To Stop fraud in Capital Market : SEBI has many powers for stopping fraud in capital market. SEBI creates good relationship with ICAI for bringing more transparency in . these companies buy all other companies or deal of merging. To audit the performance of stock market : SEBI uses his powers to audit the performance of different Indian stock exchange for bringing transparency in the working of stock exchanges. 6. It can impose the penalties on capital market intermediaries if they involve in insider trading. 7. It can ban on the trading of those brokers who are involved in fraudulent and unfair trade practices relating to stock market. 90 day limit for carry forward. So. 5.

Investment banking provides financial advice to investors and helps them by assisting in purchasing and trading securities as well as managing financial assets . whether CAs are doing their duty by ethical way or not. 10. investors of India can easily trust on audited financial reports. SEBI is investigating with ICAI. SEBI has now been decided to permit Stock Exchanges to introduce derivative contracts on Volatility Index. To educate the investors : Time to time. Moreover. SEBI arranges scheduled workshops to educate the investors Functions of Investment Banking: Investment banks carry out multilateral functions. 8. 9. After Satyam Scam. Introduction of derivative contracts on Volatility Index : For reducing the risk of investors. Some of the most important functions of investment banking are as follows: • • Investment banking helps public and private corporations in issuance of securities in the primary market. SEBI sent the letter to all Registered Portfolio Managers of India for demanding report. They also act as intermediaries in trading for clients. To Require report of Portfolio Management Activities : SEBI has also power to require report of portfolio management to check the capital market performance. Recently.the auditing work of company accounts because audited financial statements are mirror to see the real face of company and after this investors can decide to invest or not to invest.

They mainly specialize in bond trading. can be used by the sales force in suggesting ideas to the customers. Although the research division generates no revenue. providing technical analysis or program trading as well as advising for mergers and acquisitions Core activities of Investment Banking • • • Investment banking: is the traditional aspect of investment banks that involves helping customers raise funds in the capital markets and advise them on mergers and acquisitions. often with "buy" or "sell" ratings. negotiating with a merger target and coordinating with bidders. . the traders will buy and sell securities or financial products with the goal of earning an incremental amount of money on every trade. Investment banking can also involve subscribing investors to a security issuance. its resources can be used to assist traders in trading. and by the investment bankers for covering their clients.• • Investment banking differs from commercial banking as investment banks don't accept deposits neither do they grant retail loans. Small firms which provide services of investment banking are called boutiques. the main function of a large investment bank is buying and selling products. Sales is the term that is used for the sales force. Sales and trading: Depending on the needs of the bank and its clients. whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas and take orders Research: is the division of investment banks which reviews companies and makes reports about their prospects. In market making.