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8/6/2019 Final Book Building Process
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Book Building Process
The price discovery mechanism
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Meaning
It is a process used for marketing a publicoffer of equity shares of a company.
It is a mechanism where, during the
period for which the book for the IPO isopen, bids are collected from investors atvarious prices, which are above or equalto the floor price.
The process aims at tapping bothwholesale and retail investors. Theoffer/issue price is then determined afterthe bid closing date based on certainevaluation criteria.
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The Process
The Issuer who is planning an IPO nominates a leadmerchant banker as a 'book runner'.
The Issuer specifies the number of securities to beissued and the price band for orders.
The Issuer also appoints syndicate members withwhom orders can be placed by the investors.
Investors place their order with a syndicate memberwho inputs the orders into the 'electronic book'. Thisprocess is called 'bidding' and is similar to openauction.
A Book should remain open for a minimum of 3 daysand maximum for 10 days.
Bids cannot be entered less than the floor price. Bids can be revised by the bidder before the issue
closes.
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Process.
On the close of the book building period the 'bookrunner evaluates the bids on the basis of theevaluation criteria which may include - Price Aggression Investor quality
Earliness of bids, etc. The book runner and the company conclude the
final price at which it is willing to issue the stock andallocation of securities.
Generally, the number of shares are fixed, the issue
size gets frozen based on the price per sharediscovered through the book building process. Allocation of securities is made to the successful
bidders. Book Building is a good concept and represents a
capital market which is in the process of maturing.
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8/6/2019 Final Book Building Process
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Guidelines for Book Buildings
Rules governing book building is covered inChapter XI of the Securities and Exchange Board ofIndia (Disclosure and Investor Protection) Guidelines
2000.
Book building is a process by which demand ofsecurities which are being offered, is elicited andprice is determined.
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Difference b/w fixed price offer and
book buildings.
Fixed Price Process Book Building Process
Price at which the securities are
.offered/allotted is known in advanceto the investor.
Demand for the securities offered is
known only after the closure of the
issue.
Payment is made at the time of
subscription wherein refund is given
after allocation
Price at which securities will be
offered/allotted is not known inadvance to the investor. Only an
indicative price range is known.
Demand for the securities offered can
be known everyday as the book is
built.
Payment only after allocation
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Regulatory Framework of SEBI
1. In January 2000, SEBIh
as issued a compendium of guidelines, circulars andinstructions to merchant bankers relating to issue of capital, including those on the
book-building mechanism. The compendium includes a model time frame for
book-building: After the price has been determined on the basis of bidding,
statutory public advertisements for a continuous three days containing, inter alia,
the price as well as a table showing the number of securities and the amount
payable by an investor, based on the price determined, shall be issued and the
interval between the advertisement and issue opening date should be a minimum
of five days.
2. 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 issuing company can also fix a minimum bid size. An initial
bid can be changed before the final rate is determined.
3. The 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 and the quantum of securities
offered.
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Cont
4. The year 2000, Amendment to the Act gave legal cloak to the book-building route
by allowing circulation of the information memorandum and the red herring
prospectus. According to the Act, a process is to be undertaken prior to the filing
of a prospectus by which a demand for the securities proposed to be issued by a
company is elicited, the price and the terms of the issue of such securities are
assessed by means of a notice, circular, advertisement or document. Incidentally,
the working group on the Comprehensive Companies Bill, 1997 (since lapsed) had
advocated introduction of book-building. It defined the term as an international
practice that refers to collecting orders from investment bankers and large
investors based on an indicative price range. In capital markets, with sufficient
width and depth, such a pre-issue exercise often allows the issue to get a better
idea of the demand and the final offer price of an intended public offer.
5. SEBI (Disclosure and Investor Protection) Guidelines, 2000 contains provisions
for book building under chapter XI that includes guidelines for 75 per cent book
building process, 100 per cent book-building process, disclosure requirements,
allocation/allotment procedure and maintenance of books and records.
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Book building should contain two
things
(a) The Book Building portion and
(b) The fixed price portion
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1. 75% Book Building process: Under this process 25% of the
issue is to be sold at a fixed price and the balance 75%
through the Book Building process
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2. Offer to public through Book building process: Theprocess specifies that an issuer
company may make an issue of securities to the publicthrough 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-buildingprocess and 25%
of the net offer to the public at the price determinedthrough book building
process.
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Thank you