Book Building

Presented by:

Rajni Sharma

MBA, Final Year

Contents

I. MeaningII. Concept and MechanismIII. Types of Book BuildingIV. Book Building ProcessV. Guidelines Prescribed by SEBIVI. Limitations

Meaning

Book Building refers to the collection of bids from investors, based on a floor price, which is indicated before the opening of the bidding process. The issue price is fixed after the bid closing date.

Book Building is a technique used for marketing a public offer of equity shares of a company.

Definition

Book Building is a process of fixing the price for an issue of securities on the feedback from potential investors based upon their perception about the company.

Investment in Securities

IPO (Initial Public Offer)

Through Direct market purchase. (BSE, NSE)

“IPO is when a privately owned company issues shares of stock to be sold to the general public.”

Book Building and IPO IPO before Book Building Buying of shares on fixed price.

IPO after Book Building Share prices between a specified price band

Price band in the book building process refers to the band within which the investors can bid. The spread between the floor and the cap of the price band should not be more than 20%

Difference b/w shares through book building and normal public issues

Features Fixed Price process Book Building process

Pricing

Price at which the securities are

offered/allotted is known in advance to the investor.

Price at which securities will be offered/allotted is not known in

advance to the investor. Only an indicative price range is known.

Demand

Demand for the securities offered is known only after the closure of the issue

Demand for the securities offered can be known

everyday as the book is built.

Payment

100 % advance payment is required to

be made by the investors at the time of

application.

10 % advance payment is required to be made by the QIBs along with the application, while

other categories of investors have to pay 100 % advance along with the application.

Types of Book Building

75% Book Building

100% Book Building

Types of Investors The retail individual investor (RII)----- 35% Non-institutional investor (NII)----- 15% Qualified Institutional Buyers (QIBs)-----50%

RII is an investor who applies for stocks for a value of not more than Rs. 100,000.

NIIs are commonly referred to as high net-worth individuals.

QIBs are institutional investors who posses the expertise and the financial muscle to invest in the securities market.

Division of shares in 100% Book Building

Structure of Book Building

Process of Book Building

How is Book Built in India?

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Regulatory Framework On the recommendations of Malegam committee, The concept

of Book Building assumed significance in India as SEBI approved, with effect from November 1, 1995, the use of the process in pricing new issues.

SEBI issued the guidelines under which the option of 100% book-building was available to only those issuer companies which are to make an issue of capital of and above Rs. 100 crore.

These guidelines were modified in 1998-99. The ceiling of issue size was reduced to Rs. 25crore.

SEBI modified book-building norms for public issues in 1999 and allowed the issuer to choose either the existing or the modified mode of book building.

Contd…

Modified Guidelines:- Compulsory display of demand at the terminals was made

optional. The reservation of 15% of the issue size for individual investors

could be clubbed with fixed price offer. The issuer was allowed to disclose either the issue size or the

number of securities being offered. The allotment of the book built portion was required to be

made in Demat mode only. In April 2000, SEBI modified guidelines for the 100% book-

building process. i.e. a maximum of 60% of the issue was allowed to Institutional investors and atleast 15% to non-institutional investors who had applied for more than 1,000 shares.

Example of Price discovery through book building:

ICICI was the first to price its debt issue through book building.

Limitations of Book-Building In India, unlike in the developed markets, the Book-building

process is still dependent on good faith. It is the peer pressure and reputation that ensures that there are no defaults.

The number of investors invited to apply are limited. Book building relies on much interaction among firms,

merchant bankers, and investors, which is absent in India. lack of transparency at critical steps of the book building

process. Absence of strong regulation. More lag time b/w issue pricing and listing. Collective bargaining power of institutions. High institutionalized holding may affect the stock’s liquidity,

and made it volatile as well. The limits fixed are fungible and can be altered depending

upon market conditions.

Thank You