Pricing of IPOs

 Companies eligible to make public issue can freely price their

equity shares or any security.

 Fixed Price Method

 Book Building Method
Contd…

Book Building Method

 Book Building is basically a price and demand discovery
mechanism.

 Book-Building is a process wherein the issuer of securities

asks investors to bid for his securities at different prices.
 These bids are within an indicative price-band, decided
by the issuer. The issuer sets a floor price and a band.
 Here investors bid for different quantity of shares, at
different prices.
 Considering these bids, the issuer determines a cut-off
price, which is the price at which the securities are
allotted.
Contd…
Book building mechanics

 Bids to remain open for at least 5 days

 Only electronic bidding is permitted

 Bidding demand is displayed at the end of every day.

 The lead manager analyses the demand generated and

determines the issue price or cut-off price in
consultation with the issuer.
 The cut-off price is the price discovered by the market. It is the price at
which the shares are issued to the investors.
 Investors bidding at a price below the cut-off price are ignored.
Example: Book building pricing
 Let’s say a company wants to issue
10,00,000 shares. The floor price for one
share of face value, Rs. 10, is Rs. 48 and
the band is between Rs. 48 and Rs. 55.

 At Rs. 55, on the basis of bids received,

the investors are ready to buy 2,00,000
shares. So the cut-off price can not be set
at Rs. 55 as only 2 lacs shares will be sold.
Contd…
 So as a next step, the price is lowered to Rs54. At Rs.
54, investors are ready to buy additional 4 lacs shares.
So if the cut-off price is set at Rs. 54, 6 lacs shares
will be sold. This still leaves 4 lacs shares to be sold.

 The price is now lowered to Rs. 53. At Rs. 53,

investors are ready to buy additional 4 lacs shares.
Now if the cut-off price is set at Rs. 53, all ten lacs
shares will be sold.

 Investors who had applied for shares at Rs. 55 and Rs.

54 will also be issued shares at Rs. 53.