BOOK BUILDING
INTRODUCTION
Every business organization needs funds for its business activities. It
can raise funds either externally or through internal sources. When
the companies want to go for the external sources, they use various
means for the same. Two of the most popular means to raise money
are Initial Public Offer (IPO) and Follow on Public Offer (FPO).
During the IPO or FPO, the company offers its shares to the public
either at fixed price or offers a price range, so that the investors can
decide on the right price. The method of offering shares by
providing a price range is called book building method. This method
provides an opportunity to the market to discover price for the
securities which are on offer.
CONTD..
Book Building may be defined as a process used by companies
raising capital through Public Offerings-both Initial Public Offers
(IPOs) and Follow-on Public Offers (FPOs) to aid price and demand
discovery. It is a mechanism where, during the period for which the
book for the offer is open, the bids are collected from investors at
various prices, which are within the price band specified by the
issuer. The process is directed towards both the institutional
investors as well as the retail investors. The issue price is
determined after the bid closure based on the demand generated in
the process.
CONTD..
Book Building vs. Reverse Book Building:
While book building is used to raise capital for the companys
business operations, reverse book building is used for buyback of
shares from the market. Reverse book building is also a price
discovery method, in which the bids are taken from the current
investors and the final price is decided on the last day of the offer.
Normally the price fixed in reverse book building exceeds the
market price.
CONTD..
Book Building vs. Fixed Price Method:
The main difference between the book building method and the
fixed price method is that in the former, the issue price to not
decided initially. The investors have to bid for the shares within the
price range given. The issue price is fixed on the basis of demand
and supply of the shares.
On the other hand, in the fixed price method, the price is decided
right at the start. Investors cannot choose the price. They have to
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 price method, the demand is known only after
the issue closes.
HOW IS THE PRICE FIXED?
All the applications received till the last dates are analyzed and a
final offer price, known as the cutoff price is arrived at. The final
price is the equilibrium price or the highest price at which all the
shares on offer can be sold smoothly. If the price quoted by an
investor is less than the final price, he will not get allotment.
If price quoted by an investor is higher than the final price, the
amount in excess of the final price is refunded if he gets allotment.
If the allotment is not made, full money is refunded within 15 days
after the final allotment is made. If the investor does not get money
or allotment in a months time, he can demand interest at 15 per cent
per annum on the money due.
EXAMPLE
In this method, the company doesnt fix up a particular price for the
shares, but instead gives a price range, e.g., Rs. 80 to 100. When
bidding for the shares, investors have to decide at which price they
would like to bid for the shares, 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.
CONTD..
Both the lead manager and the issuing company fix the price range
and the issue size. Next, syndicate members are hired to obtain bids
from the investors. Normally, the issue is kept open for 3 days. Once
the offer period is over, the lead manager and issuing company fix
the price at which the shares are sold to the investors.
If the issue price is less than the cap price, the investors who bid at
the cap price will get a refund and those who bid at the floor price
will end up paying the additional money. For example, if the cut off
in the above example is fixed at Rs. 90, those who bid at Rs. 80, will
have to pay Rs. 10 per share and those who bid at Rs. 100, will end
up getting the refund of Rs. 10 per share. Once each investor pays
the actual issue price, the share are allotted
STEPS IN BOOK BUILDING
The main parties who are directly associated with book building
process are the issuer company, the Book Runner Lead
Manager(BRLM)(i.e. merchant banker) and the syndicate members.
The steps to book building are:
1.The issuer company proposing an IPO appoints a lead merchant banker as a
BRLM.
2.Initially, the issuer company consults with the BRLM in drawing up a draft
prospectus (i.e. offer document) which does not mention the price of the issue,
but includes other details about the size of the Issue, past history of the company,
and a price band.
3.The draft prospectus is filed with SEBI .
CONTD..
4. A definite period is fixed as the bid period and BRLM conducts
awareness campaigns like advertisement, road shows etc.
5.The BRLM appoints a syndicate member, a SEBI registered
intermediary to underwrite the issues to the extent of net offer to
the public.
6.The BRLM is entitled to remuneration for conducting the Book
Building process.
7.The copy of the draft prospectus may be circulated by the BRLM to
the institutional investors as well as to the syndicate members.
8.The syndicate members create demand and ask each investor for the
number of shares and the offer price.
9.The BRLM receives the feedback about the investors bids through
syndicate members.
CONTD..
10.The prospective investors may revise their bids at any time during
the bid period.
11.The BRLM on receipts of the feedback from the syndicate members
about the bid price and the quantity of shares applied has to build up
an order book showing the demand for the shares of the company at
various prices.
12.On receipts of the above information, the BRLM and the issuer
company determine the issue price. This is known as the marketclearing price.
13.The BRLM then closes the book in consultation with the issuer
company and determines the issue size.
ADVANTAGES
Investor participation in price finding mechanism which is based on
demand analysis.
Transparency in pricing.
Reflects the investors perception and inherent value of the company.
Shareholders number low.
LIMITATIONS
Book-building does not provide an appropriate price discovery
mechanism. This is the main reason why small investors have stayed
away from the market.
Book-building is appropriate for mega issues only. In the case of the
potential investors, the companies can adjust the attributes of the
offer according to the preferences of the potential investors. It may
not be possible in big issues since the risk-return preference of the
investors can not be estimated easily.
There is a possibility of price rigging on listing as promoters may
try to bail out syndicate members.
ISSUE DETAIL
Issue Open: Oct 27, 2015 - Oct 29, 2015
Issue Type: 100% Book Built Issue IPO
Issue Size: Equity Shares of Rs. 10
Issue Size: Rs. 1,272.20 Crore
Face Value: Rs. 10 Per Equity Share
Issue Price: Rs. 700 - Rs. 765 Per Equity Share
Market Lot: 15 Shares
Minimum Order Quantity: 15 Shares
Listing At: BSE, NSE
INDIGO IPO REGISTRAR
Karvy Computershare Private Limited
Karvy House, 46, Avenue 4, Street No. 1,
Banjara Hills, Hyderabad - 500 034
Andhra Pradesh, India
INDIGO IPO LEAD MANAGERS
Barclays Securities (India) Private Limited
Citigroup Global Markets India Private Limited
J.P. Morgan India Private Limited
Kotak Mahindra Capital Company Limited
Morgan Stanley India Company Pvt Ltd
UBS Securities India Private Limited
INDIGO-ISSUE SUBSCRIPTION DETAIL
Number of Times Issue is Subscribed
As on Date &
Time
QIB
NII
RII
Employee
Total
Shares Offered /
Reserved
8,522,935
5,819,746
13,579,407
2,200,000
24,241,380
Day 1- Oct 27,
2015 17:00 IST
2.9590
0.0219
0.0526
0.0201
0.8603
Day 2- Oct 28,
2015 17:00 IST
5.1477
0.0421
0.1847
0.0407
1.5471
Day 3- Oct 29,
2015 20:30 IST
17.8000
3.5700
0.9200
0.1300
6.1500
INDIGO IPO LISTING DATE
Listing Date: Tuesday, November 10, 2015
BSE Script Code: 539448
NSE Symbol: INDIGO
Issue Price: Rs. 765.00 Per Equity Share
Face Value: Rs. 10.00 Per Equity Share
LISTING DAY TRADING INFORMATION
BSE
NSE
Issue Price:
Rs. 765.00
Rs. 765.00
Open:
Rs. 856.00
Rs. 855.80
Low:
Rs. 848.10
Rs. 849.00
High:
Rs. 898.00
Rs. 899.50
Last Trade:
Rs. 878.45
Rs. 877.25
Volume:
5,066,114
27,351,793
CURRENT PRICE
INDIGO Stock Quote & Charts
Closing Price: 1088.85
1.35 (0.12%)
Day Open: 1090
Day High-Low: 1114 1065
Previous Close: 1087.5
Total Traded Value: 301426
Updated On: 2015-11-26
REFERENCES
http://www.investopedia.com/
http://www.chittorgarh.com/ipo/indigo_ipo/492/
http://www.nseindia.com/
https://en.wikipedia.org/wiki/Book_building
Thank You
