BOOK BUILDING PROCESS

Presented by : Gourav

BOOK BUILDING

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 used in most developed countries for marketing a public offer of equity shares of a company. However, 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.

BOOK BUILDING
Book building is actually a price discovery method. In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100. When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range. Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price. The price at which the shares are allotted is known as cut off price. The entire process begins with the selection of the lead manager, an investment banker whose job is to bring the issue to the public.
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Book Building Option

75% Book Building

100%Book Building

The placement portion

The public portion

THE PROCESS:
The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. The Issuer specifies the number of securities to be issued and the price band for the bids. The Issuer also appoints syndicate members with whom orders are to be placed by the investors. The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction. The book normally remains open for a period of 5 days. Bids have to be entered within the specified price band. Bids can be revised by the bidders before the book closes. On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels. The book runners and the Issuer decide the final price at which the securities shall be issued. Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share. Allocation of securities is made to the successful bidders. The rest get refund orders.

TYPES OF INVESTORS

There are three kinds of investors in a book-building issue:1.The retail individual investor (RII), 2.The non-institutional investor (NII) and 3.The Qualified Institutional Buyers (QIBs). RII is an investor who applies for stocks for a value of not more than Rs 100,000. Any bid exceeding this amount is considered in the NII category. NIIs are commonly referred to as high net-worth individuals. Each of these categories is allocated a certain percentage of the total issue. The total allotment to the RII category has to be at least 35% of the total issue. RIIs also have an option of applying at the cut-off price. This option is not available to other classes of investors. NIIs are to be given at least 15% of the total issue. And the QIBs are to be issued not more than 50% of the total issue. Allotment to RIIs and NIIs is made through a proportionate allotment system. The allotment to the QIBs is at the discretion of the BRLM(Book Running Lead Manager).

QUALIFIED INSTITUTIONAL BUYERS (QIBS)

Qualified Institutional Buyers (QIBs) those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. Qualified Institutional Buyer shall mean: a) Public financial institution as defined in section 4A of the Companies Act, 1956; b) Scheduled commercial banks; c) Mutual Funds; d) Foreign institutional investor registered with SEBI; e) Multilateral and bilateral development financial institutions; f) Venture Capital funds registered with SEBI. g) Foreign Venture Capital investors registered with SEBI. h) State Industrial Development Corporations. i) Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA). j) Provident Funds with minimum corpus of Rs.25 crores k) Pension Funds with minimum corpus of Rs. 25 crores "These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process."

BOOK BUILDING VS FIXED PRICE

The main difference between the book building method and the fixed price method is that in the former, the issue price is not decided initially. The investors have to bid for the shares within the price range given and based on the demand and supply of the shares, the issue price is fixed. On the other hand, in the fixed price method, the price is decided right at the start. Investors cannot choose the price, but must buy the shares at the price decided by the company. In the book building method, the demand is known every day during the offer period, but in fixed method, the demand is known only once the issue closes.

REVERSE BOOK BUILDING

It is a price discovery mechanism for the companies who want to delist their shares or buy back shares from the shareholders. Green Shoe Option; It is also referred to as an over allotment option. It is a mechanism to provide post listing price stability to an initial public offering.