Book Building Mechanism

BOOK BUILDING
Initial Public Offerings (IPO)

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.
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.
Book building is actually a price discovery method. In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs 90-110. When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 90, Rs 100 or Rs 110. They can bid for the shares at any price within this range. Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 90) is known as the floor price and the highest price (Rs 110) is known as cap price. The price at which the shares are allotted is known as cut off price.
Book Building in India

Some of the important terms and conditions were: (a) The option should be available only to issues exceeding Rs. 100 crores; (b) The issuer companies could either reserve the securities for firm allotment or avail themselves of the book-building process (c) Draft prospectus to be submitted to SEBI could exclude information about the offer price; (d) A book runner to be nominated from among the lead market bankers charged with specific responsibilities and the name submitted to SEBI and (e) The requirement of 25 per cent of the securities to be offered to the public will be applicable.
Types of Book Building

1) 75% Book Building Process-In an issue of securities to the public through a prospectus the option for 75% book building shall be available to the issuer company.
2) Offer to Public Through Book Building Process 100% of the net offer to the public through book building process , or 75% of the net offer to the public through book building process and 25% at the price determined through book building.
The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. The Issuer specifies the number of securities to be issued and the price band for the bids. 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 5 days. Bids have to be entered within the specified price band. 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 are 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.
The Process
Procedures
Issuers Issuers desirous of using NSE's online IPO system are required to comply with the following procedures: Submit a written request as per prescribed format for usage of electronic facilities and software of NSE. Give details regarding Book Running Lead Manager, Co Book Running Lead Managers and Syndicate Members. Pay the requisite charges to NSE. Trading Members The Book Running Lead Manager will give the list of trading members who are eligible to participate in the Book Building process to the Exchange. Members have to submit a one time undertaking the Exchange. Eligible trading members have to give in the prescribed format details of the user IDs that they would like to use. Subscribers Subscribers can approach any of the approved trading members for submitting bids in the IPO system. On line transaction registration slip are generated automatically after entering the bids in to the system which acts as proof of the registration of each Bid option.
Types of investors
There are three kinds of investors in a bookbuilding issue: Retail individual investor (RII), Non-institutional investor (NII) and Qualified Institutional Buyers (QIBs).
How is the price fixed?

All the applications received till the last dates are analyzed and a final offer price, known as the cut-off 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 your price is less than the final price, you will not get allotment. If your price is higher than the final price, the amount in excess of the final price is refunded if you get allotment. If you do not get allotment, you should get your full refund of your money in 15 days after the final allotment is made. If you do not get your money or allotment in a month's time, you can demand interest at 15 per cent per annum on the money due.
ADVANTAGES OF BOOK BUILDING:

a) The book-building process helps the issuer company and the lead merchant banker to discover the demand for the securities. b) The book building process provides the flexibility to a company in fixing the final issue price. c) The price at which the issue is likely to be fully subscribed may be ascertained.
Limitations of Book-Building System:

1. Book-building is appropriate for mega issues only. 2. The issuer company should be fundamentally strong and well known to the investors; 3. The book-building system works very efficiently in matured market conditions. In such circumstances, the investors are aware of the various parameters affecting the market price of the securities. But, such conditions are not commonly found in practice; 4. There is a possibility of price rigging on listing as promoters may try to bail out syndicate members.
Initial Public Offerings (IPO) at NSE

Company Name RDB Rasayans Ltd Prakash Constrawell Ltd PG Electroplast Ltd Issue Start Date 21-Sep-2011 19-Sep-2011 7-Sep-2011 Issue End Date 23-Sep-2011 21-Sep-2011 12-Sep-2011 Status Active Closed Closed
SEBI Guidelines
In January 2000, SEBI came out with a compendium of guidelines, circulars and instructions to merchant bankers relating to issue of capital, including those on the bookbuilding mechanism. The advertisement and issue opening date should be a minimum five days.
The draft prospectus to be circulated has to indicate the price band within which the securities are being offered for subscription. The bids have to be within the price bands. Bidding is permissible only if an electronically linked transparent facility is used. An issue company can also fix a minimum bid size. An initial bid can be changed before the final rate is determined.
Two of the recent mega issues, one by Petronet LNG and the other by Biocon, were both through the 100 per cent book-building route. Prospective bidders were advised to read the red herring prospectus carefully. According to the Act, a red herring prospectus means a prospectus that does not have complete particulars on the price of securities offered and the quantum of securities offered.
REVERSE BOOK BUILDING MECHANISM

The Reverse Book Building is a mechanism provided for capturing the sell orders on online basis from the share holders through respective Book Running Lead Managers (BRLMs) which can be used by companies intending to delist its shares through buy back process. In the Reverse Book Building scenario, the Acquirer/Company offers to buy back shares from the share holders. The Reverse Book Building is basically a process used for efficient price discovery. It is a mechanism where, during the period for which the Reverse Book Building is open, offers are collected from the share holders at various prices, which are above or equal to the floor price. The buy back price is determined after the offer closing date
CONCLUSION
The spirit beyond the introduction of bookbuilding mechanism in India is to discover the right price for a public issue, which in turn would eliminate unreasonable issue pricing by greedy promoters.

Book Building Mechanism

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BOOK BUILDING

Initial Public Offerings (IPO)

Book Building in India

Types of Book Building

How is the price fixed?

ADVANTAGES OF BOOK BUILDING:

Limitations of Book-Building System:

Initial Public Offerings (IPO) at NSE

REVERSE BOOK BUILDING MECHANISM

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