WHAT IS BOOK BUILDING?

o Book Building is essentially a process used by companies

raising capital through Public Offerings-both Initial Public Offers (IPOs) or Public Offers ( POs) to aid price and demand discovery.
o 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.
o The process is directed towards both the institutional as well

as the retail investors.

the demand generated in the process.

Fixed Price Issues This has the following features: Price at which the securities are offered and would be allotted is made known in advance to the investors Demand for the securities offered is known only after the closure of the issue 100 % advance payment is required to be made by the investors at the time of application Book Building Issues This has the following features A price band is offered by the issuer within whom investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding Demand for the securities offered, and at various prices, is available on a real time basis

The book building method of pricing securities is becoming popular in India. During 1997-98, Various issuers like IPCL, HUDCO, HAL and Hidalgo Industries have used book building route to fix the coupon rate on their bond issue.

Although specific processes differ from country to country, Book Making processes would generally follow the same pattern stated below:

The Issuer specifies the number of securities to be issued and the price band for the bids It is not unusual for the upper price of the band to be a maximum of 1.2 times the floor price. 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 say! 5 days. Bids have to be entered within the specified price band, else would be rejected. 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 is 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.

Retail Investor Qualified Institutional Buyer Red Herring Prospectus Offer Document Green Shoe option Syndicate Member Floor Price/Cap Price

Underwriting of shares is a guarantee or insurance given by the underwriter to the company that the shares offered to the public will be subscribed in full.

Underwriting refers to the process that a large financial service provider (bank, insurer, investment house) uses to assess the eligibility of a customer to receive their products (equity capital, insurance, mortgage, or credit).

UNDERWRITERS: o Underwriters are the person or institution underwriting the public issue of share. They ensure the company that in case the shares that are offered to the public are not subscribed by the public to the extent, the balance of shares will be taken up by them. UNDERWRITING COMMISSION: o It is the consideration which is payable to the underwriters for underwriting the shares of the company. This commission is paid at a specified rate on the issue price of the shares underwritten.

Articles must authorize the payment of such commission. Rate should not exceed 5% of issue price if shares or the amount authorize by the Articles whichever is less. The commission agreed to be paid must be disclosed in the prospectus. Number of shares which underwriters have agreed to subscribe should be disclosed in the prospectus. A copy of contract regarding the payment of commission should be delivered to the Registrar. The commission is only payable if the shares are offered to the general public.

Once the underwriting agreement is struck, the underwriter bears the risk of being able to sell the underlying securities, and the cost of holding them on its books until such time in the future that they may be favourably sold.

If the instrument is desirable, the underwriter and the securities issuer may choose to enter into an exclusivity agreement. In exchange for a higher price paid upfront to the issuer, or other favorable terms, the issuer may agree to make the underwriter the exclusive agent for the initial sale of the securities instrument. That is, even though third party buyers might approach the issuer directly to buy, the

Now in most cases, the underwriter will buy the stock from the corporation and sell it at a higher price to the public (this is how investment bankers make their money off underwriting). The difference between the price that the underwriter pays for the stock and the price the public pays for the stock is known as the underwriting spread and is the reward to the underwriter.

In investment banking, an underwriting contract is a contract between an underwriter and an issuer of securities. The following types of underwriting contracts are most common: In the firm commitment contract the underwriter guarantees the sale of the issued stock at the agreed upon price. For the issuer, it is the safest but the most expensive type of the contracts, since the underwriter takes the risk of sale. In the best efforts contract the underwriter agrees to sell as many shares as possible at the

Under the all or none contract the underwriter agrees either to sell the entire offering or to cancel the deal.

Standby underwriting:
o Stand by underwriting also known as strict

underwriting or old fashioned underwriting is a form of stock insurance: the issuer contracts the underwriter for the latter to purchase the shares

The underwriting process begins with the decision of what type of offering the company needs. The company usually consults with an investment banker to determine how best to structure the offering and how it should be distributed. Securities are usually offered in either the new issue (IPO's), or the additional issue market.

The next step in the underwriting process is to form the syndicate (and selling group if needed). As most new issues are too large for one underwriter to effectively manage, the investment banker, the underwriting manager, invites other investment bankers to participate in a joint distribution of

The group of investment bankers is known as the syndicate. Members of the syndicate usually make a firm commitment to distribute a certain percentage of the entire offering and are held financially responsible for any unsold portions. Whenever new shares are issued, there is a spread between what the underwriters buy the stock from the issuing corporation for and the price at which the shares are offered to the public (Public Offering Price, POP). The price paid to the issuer is known as the underwriting proceeds. The spread between the POP and the underwriting proceeds is split into the following components: Manager's Fee goes to the managing underwriter for negotiating and managing the offering. Underwriting Fee goes to the managing underwriter and syndicate members for assuming the risk of buying the securities from the issuing corporation. Selling Concession goes to the managing underwriter, the syndicate members, and to selling group members for placing the securities with investors.