All you need to know about - Book Building

Meaning: 

Every organization requires funds to carry out its business activities. It can raise funds either externally or through internal sources. When the companies want to go for the external sources, they may resort to various means. 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.

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.

Process Flow:

The following are the important steps in book building process:

1. The Issuer who is planning an offer nominates lead merchant banker(s) as ‘Book Runners’.

2. The Issuer specifies the number of securities to be issued and the price band for the bids.

3. The Issuer also appoints Syndicate Members with whom orders are to be placed by the investors.

4. The Syndicate Members put the orders into an ‘Electronic Book’. This process is called ‘Bidding’ and is similar to open auction.

5. The book normally remains open for a period of 5 days.

6. Bids have to be entered within the specified price band.

7. Bids can be revised by the bidders before the book closes.

8. On the close of the book building period, the Book Runners evaluate the bids on the basis of the demand at various price levels.

(Ki kis price par demand sabse zyada aa rahi hai)

9. The Book Runners and the Issuer decide the final price at which the securities shall be issued.

10. Generally, the number of shares is fixed; the issue size gets frozen based on the final price per share.

11. Allocation of securities is made to the successful bidders. The rest bidders get refund orders.

Summary:

No Fixed Price rather a Price Range exists. Subscribers bid within that range.

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 the stipulated time after the final allotment is made. If the investor does not get money or allotment in a month’s time, he can demand interest at prevailing rates on the money due.

Confession:

The information is collected from Finance based books and various sites and then moulded into simple language. Hope the information was useful.

Your feedback will be appreciated.

The author can also be reached at gyatigupta1995@gmail.com.