A corporate may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company.
What is Book Building?
SEBI guidelines defines Book Building as “a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document”.
Book Building is basically a process used in Initial Public Offer (IPO) for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.
As per SEBI guidelines, an issuer company can issue securities to the public though prospectus in the following manner:
100% of the net offer to the public through book building process 75% of the net offer to the public through book building process and 25% at the price determined through book building. The Fixed Price portion is conducted like a normal public issue after the Book Built portion, during which the issue price is determined. The concept of Book Building is relatively new in India. However it is a common practice in most developed countries.
Difference between Book Building Issue and Fixed Price Issue
In Book Building securities are offered at prices above or equal to the floor prices, whereas securities are offered at a fixed price in case of a public issue. In case of Book Building, the demand can be known everyday as the book is built. But in case of the public issue the demand is known at the close of the issue.
Advantages enjoyed by the company by considering Book-Building Mechanism
The issue’s expenses are reduced as a consequence of the book-building process. Book-building, in particular, saves the issuer a lot of money on advertising and brokerage.
The allocation of shares to investors is more transparent.
The issuer receives the best possible price for the security.
Book-building leads to price discovery and aids in the determination of the security’s inherent worth.
The issuing firm has the option of selecting high-quality investors.
The price of a security is more realistically established by considering the demand for security.
The issue price is market-determined. As it is a distant possibility that the market price of the shares would fall lower than the issue price. Hence, the investor is less likely to suffer from erosion of his investment on listing.
Optimal demand based pricing is possible.
Efficient capital raising with improved issue procedures, leading to a reduction in issue costs, paper work and lead times.
Flexibility to increase/decrease price and/or size of offering the issues is possible.