Book building is the process by which an underwriter attempts to determine the price at which an initial public offering (IPO) will be offered. Book building has surpassed the 'fixed pricing' method, where the price is set prior to investor participation, to become the de facto. The book building process helps determine the value of the security. Once a company determines it wants to have an IPO, it will then. Companies all over the world use either fixed pricing or book building as a mechanism to price their shares. In this article, we will study how book building process works i.e. how are shares priced in an IPO: Book building is a price discovery mechanism that is used in the stock.

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Book Building Process

Read this article to learn about the meaning of book building, its process and comparison with fixed price method and reserve book building. It is known only after the closure of the book building process. It is a common method of marketing of new issues in several developed countries. In book building. Book Building is basically a capital issuance process used in Initial Public Offer ( IPO) which aids price and demand discovery. It is a process.

It is a process used in IPOs for efficient price discovery. The price at which securities would be offered is not known initially. It is known only after the closure of the book building process. It is a common method of marketing of new issues in several developed countries. In book building method, the market discovers the price instead of the company determining the price. No price is fixed for the shares; instead, the company fixes a price band at which a share can be sold. Bids are then invited for the shares. The IPO should be kept open for a minimum of three days and bids are invited during this period.

While Tata Sons will offer 3,, shares if the Green shoe Option is exercised, 1,, shares will be offered by Sheba Properties and Kalimati Investment Company will offer , shares.

The company will pay a fee of Rs. As per the draft, the stabilising agent will first borrow the equity shares from Green shoe lenders, other than Tata Sons, and, only if the shares borrowed from them are not sufficient, shares will be borrowed from Tata Sons.

The equity shares available for allotment under the Green shoe Option will first be allotted to employees up to 10 per cent of the Green shoe amount.

The rest will be shared between qualified institutional downloaders, non-institutional bidders, and retail individual bidders in the ratio of Price Band: It sets up the lower and upper limit for the price of a share and it is related to Book-building process regaining the issue of shares to the public. The minimum price of a share is called floor price whereas the maximum prices of a share is called Cap Price and the actual cut-off price is the price which is settled at last and offered to the investors.

For example, if X Ltd. Amount of investment should exceed Rs.

Under this category amount of investment should not exceed Rs. Since a retail individual bidder cannot invest more than Rs. The following example will explain the matter clearly: For example, X Ltd. Now, if Mr. X bids for shares and in multiple of shares at floor price Rs.

Similarly, if he applies at the Cap Price of Rs. Since they do not have to deposit any margin money to the company, the minimum or the maximum limit of investments i. Under this category all valid applications are taken into consideration and shares are allotted provided there is no oversubscription.

Book Building Definition

Retail individual bodies include: Under this category amount of investment should not exceed Rs. Since a retail individual bidder cannot invest more than Rs. For example, X Ltd.

Now, if Mr. X bids for shares and in multiple of shares at floor price Rs. Similarly, if he applies at the Cap Price of Rs. Qualified Institutional downloaders include: Financial Institutions, Insurance Companies, etc.

Book building

Since they do not have to deposit any margin money to the company, the minimum or the maximum limit of investments i. Employees include: Under this category all valid applications are taken into consideration and shares are allotted provided there is no oversubscription.

Registered Office: Public Issue of 81,50, Equity Shares of Rs. The face value of the Equity Shares is Rs.

The Issue would constitute A summary of the Final demand at various price levels as per the electronic book is given: The total valid bids were received for 17,59, Equity Shares, hence full and firm allotment was made to all valid applications. On a proportionate basis after rounding off to the nearest one share, subject to a minimum allocation of equity shares. The total number of shares allocated in this category is 2,, The category-wise details and the Basis of Allocation is as under:.

Understanding Book Building process | Methods | Steps involved

Since the employee category was under-subscribed, all valid applications in this category have received full allotment. This would often leave an investor guessing as to what should be the price at which he should be placing his bid so as to get a pie of the allotment.

However, this shortcoming is taken care of. Now the investor knows the upper limit and can place the bid at the upper end of the price band if he finds the same as value for him.

Therefore, the risk that he has overpriced his bid is reduced to some extent. Another change made by SEBI in the rules governing primary market issues is that institutional bidders cannot withdraw their bids. Prior to this change, institutional bidders could tie-up with the lead book running managers and submit inflated bids thus creating an artificial demand and price for the issue.

This would attract the ignorant and innocent retail investors into subscribing for the issue and then the institutional bidder could easily withdraw its bid, leaving the small investors in the lurch. However, now it makes it rather impossible for the institutions to take retail investors for a ride. This right will be exercised by the company, but naturally, in the case of extra demand due to oversubscription of the issue.

Book Building Process - How Are Prices of Shares Decided in an IPO ?

This would, thus, help reduce price volatility post listing of the security. This move is more in line with the international practice. Another welcome change in order to safeguard investor interests includes making the board of the company more responsible towards what they state in the book building document.

Also, the CFO of the company has to authenticate the financial statements stated with this document. Bottomline, the chief executive officer or the chief financial officer of a company will certify the disclosures in the offer document. Thus, the recent amendments announced by SEBI, aim at strengthening investor confidence.

But then, one must remember, that Indian investors tend to adapt themselves quickly to changing systems and scenarios.

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