Book building is a process of price discovery. Book building is a process by which the issuer company before filing of the prospectus, builds-up and ascertains the demand for the securities being issued and assesses the price at which such securities may be issued and ultimately determines the quantum of securities to be issued.
Under book building process, the issuing company is required to tie up the issue amount by way of private placement. The issue price is not priced in advance. It is determined by offer of potential investors about price which they may be willing to pay for the issue. To tie-up the issue amount, the company organizes road shows and various advertisement campaigns.
Process of Book Building
A Book Building process involves following steps :
Shares may be offered at a fixed price or at a variable price during an initial public offering. If, a company is undecided about the precise price at which to sell its shares, it might opt for a range of values rather than a single figure. This technique comprises providing a price range to investors and then asking for bids on that price range. It is widely acknowledged as one of the most effective strategies for determining the price of securities on the secondary market.
Appointment of Investment Banker
The appointment of a head investment banker is the first stage. Due diligence is handled by the principal investment banker. They recommend the magnitude of the company’s capital raise. They then provide a price range for the shares that will be sold. If management agrees with the
investment banker’s recommendations, the prospectus is released with the proposed price range. The floor price refers to the lower end of the price range, while the ceiling price refers to the upper end. After the complete book building process, the cut-off price is the ultimate price at which securities are actually offered for sale.
Bids for the shares are sought from market participants. They must bid on the amount of shares they are willing to purchase at various price levels. The investment bankers are intended to
receive these bids, as well as the application money. It should be emphasized that the collecting
of bids is not done by a single investment banker. Rather, the main investment banker may
employ sub-agents to connect into their network in order to get bids from a wider number of
The lead investment banker will begin the process of price discovery after all of the bids have
been compiled. The ultimate price was determined by the investment banker’s weighted
average of all offers received. The cut-off price is set at this amount. The ceiling price is often
the cut-off price for any subject that has garnered significant media attention and is widely
anticipated by the public.
Stock markets all across the globe compel firms to make the specifics of the offers they received
public in the interest of transparency. It is the responsibility of the lead investment banker to
publish advertising for a set length of time (let’s say a week) that specify the offers received for
the acquisition of shares. Many markets’ authorities have the authority to physically inspect bid
applications if they so want.
Finally, the bidders’ application amounts must be amended, and shares must be distributed. For
example, if a bidder’s price is less than the cut-off price, a call letter must be issued to the bidder
requesting payment of the remainder. If a bidder exceeds the cut-off price, a refund check must
be sent. The cut-off payment is collected from investors instead of the shares offered to them as
part of the settlement procedure.
Types of Book Building Process
The Companies in India are bound to follow to the SEBI’s guidelines for book building offers in
the following manner:
1. 75 percent Book-Building Process: Under this process 25 percent of the issue is to be sold at a fixed price and the balance of 75 percent through the Book Building process.
2. Offer to public through Book building process: The process specifies that an issuer company may make an issue of securities to the public through prospectus in the following manner:
a. 100% of the net offer to the public through book building process, or
b. 75% of the net offer to the public through book building process and 25% of the
net offer to the public at the price determined through book building process.
3. Pure Auction as an Additional Book building Mechanism: SEBI has decided to introduce an additional method of book building, to start with, for FPOs, in which the issuer would decide on a floor price and may mention the floor price in the red herring prospectus.
If the floor price is not mentioned in the red herring prospectus, the issuer shall announce the floor price at least one working day before opening of the bid in all the newspapers in which the pre-issue advertisement was released.
According to the Companies Act of 2013, the company must examine the following procedural and legal considerations before going public: –
- Public Limited Corporation must have at least 7 shareholders to be formed.
- A public limited corporation must have at least three directors.
- A share capital of at least Rs. 5 lakhs is necessary.
- When presenting self-attested copies of identification and address evidence, one of the
directors’ digital signature certificate (DSC) is required. The planned company’s directors will
need a DIN.
- In order to choose the company’s name, an application must be submitted.
- The company’s principal object clause must be included in an application. This object clause
will specify what a business will do when it is formed.
- The application must be submitted to the ROC together with the appropriate papers such as
the MOA, AOA, and correctly filed Form DIR – 12, Form INC – 7, and Form INC – 22.
- The specified registration costs must be paid to the ROC.
- The firm shall apply for a “certificate of business beginning” after receiving clearance from