Book Building

Book Building

Book building is a technique used to set the price of an IPO, where underwriters assess investor interest at various prices. For example, if XYZ Tech holds an IPO with a share price range of Rs. 210 to Rs. 250, investors submit bids within this spectrum, thereby aiding in the precise determination of the final share price.

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Book Building Meaning

Book building refers to how an underwriter attempts to determine the price at which an initial public offering (IPO) will be offered. The price discovery involves recording investor demand for shares at various price levels while building up to the IPO. 

It is a strategy used in capital markets for price and demand discovery, which is crucial in setting a realistic price range for a company’s shares. During this phase, the underwriter releases a prospectus about the company and its offerings, along with a range of prices for the shares. 

Investors use this information to submit their bids, including the number of shares they want to purchase and the price they’re willing to pay. This allows the underwriter and the company to assess the market’s appetite for their shares and set a final issue price that reflects investors’ willingness to invest.

Book Building Example

Let’s say XYZ Tech launches an IPO, it would release a red herring prospectus through its underwriters, suggesting a price band for the shares, say Rs. 210 to Rs. 250. During the book-building phase, investors place bids for shares, specifying their desired quantity and the price within this range.

Let’s say the bids are as follows:

Investor A bids for 1,000 shares at Rs. 240 per share.

Investor B bids for 1,500 shares at Rs. 245 per share.

Investor C bids for 500 shares at Rs. 250 per share.

The book runner would compile these bids and analyze the data to determine the most efficient pricing for XYZ Tech’s shares. If the demand is high at the upper end of the price band, the final issue price may be set closer to Rs. 250. If the demand is more substantial at the lower end, the price may be set closer to Rs. 210. This process ensures that the shares are priced to reflect the current market demand.

Book Building Process

The book-building process begins with the issuer announcing the details of the public offering, including the price band and the bidding period. Interested investors are then invited to submit their bids within this timeframe. 

The steps typically involve:

  1. The issuer discloses the price band and records investor interest during the book-building period.
  2. Investors place their bids, indicating the number of shares they wish to buy and the price they are willing to pay.
  3. After the bidding period closes, the issuer and underwriters analyze the bid data to determine the final issue price.

For instance, consider a company launching an IPO with a price band of Rs. 100 to Rs. 120. Many bids might come in at a higher price point during the book-building period, indicating strong market confidence. This would likely lead the company to set the final issue price at or near Rs. 120.

Conversely, suppose bids cluster at the lower end. In that case, the final price might be closer to Rs. 100. This method ensures that the share price accurately reflects what investors are ready to pay, balancing market demand with the company’s capital-raising objectives.

Types Of Book Building

Book building is primarily categorized into two types: fixed price book building and price discovery book building. 

Here’s a closer look at each:

  1. Fixed Price Book Building: Under this method, the price of the securities is fixed in advance. Investors know the price upfront and decide whether or not to participate in the offering at that price.
  2. Price Discovery Book Building: This is the more common method where the price is flexible. Instead, the issuer offers a price range, and investors bid within this range, leading to the discovery of the final issue price based on demand.

For example, in a fixed-price scenario, a company might offer shares at a flat rate of Rs. 150 per share. Investors can take it or leave it. In price discovery, the same company might set a range of Rs. 140 to Rs. 160 and let market demand determine the final price.

Difference Between Book Building And Reverse Book Building

The primary difference between book building and reverse book building is that in book building, investors bid to buy shares at their desired price. In contrast, reverse book building involves shareholders submitting bids to sell their shares, helping determine a buyback price for the company’s share repurchase.

AspectBook BuildingReverse Book Building
PurposeTo determine the issue price for a new securityTo determine the buyback price for existing shares
Direction of Price DiscoveryFrom investors to issuerFrom shareholders to company
Used DuringInitial Public Offerings (IPOs)Share Buyback Programs
Participant ActionInvestors bid for shares at a price they are willing to payShareholders offer shares at a price they are willing to sell
OutcomeFinalizes the price at which the company will issue its sharesFinalizes the price at which the company will buy back shares
BenefitHelps companies raise capital with market-driven pricingAllows companies to adjust capital structure and potentially increase stock value

Advantages Of Book Building

The key advantage of book building is the efficient and transparent price discovery mechanism it provides. Aggregating investors’ bids ensures that the final issue price reflects the market demand for the security. 

Here’s how this and other advantages play out:

  • Efficient Price Discovery: The book-building process allows the market to play a significant role in determining the security price, leading to a fair valuation that reflects the company’s actual market worth.
  • Wide Investor Participation: By not setting a fixed price, book building can attract a broader range of investors, each with different perceptions of value, leading to a more successful issue.

Disadvantages of Book Building

The primary disadvantage of the book-building process is its complexity, as it requires a delicate balance of market demand and investor interest to arrive at an optimal price. This complexity can deter smaller investors and lead to price volatility if not managed well. Moreover, it relies significantly on underwriters’ skills to gauge market sentiment accurately.

  • Complexity: The process can be more complex and time-consuming than a fixed-price offering, requiring more effort from both the issuer and the investors.
  • Market Volatility: Since the final price is set at the end of the book-building process, market volatility can significantly impact the outcome, sometimes to the issuer’s disadvantage.

To understand the topic and get more information, please read the related stock market articles below.

Deemed Prospectus
Shelf Prospectus
Capital market meaning
Issue Price
Non institutional investors
Qualified Institutional Buyer
Types of IPO
Over Subscription Of Shares
Under Subscription Of Shares

What Is Book Building? – Quick Summary

  • Book building is an auction process where the demand for a security is gauged and price determined based on investor interest.
  • Book building helps in efficient price discovery which is a method that uses investor bids to find the optimal price for a security.
  • Book building encourages diverse investor involvement, contributing to a more successful issue.
  • While offering a fair valuation, book building process can be complex and susceptible to market volatility.
  • There are different types of book building, each with unique steps and methods to finalize the issue price.
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Book Building – FAQs

What Is Book Building?

Book building systematically generates, captures, and records investor demand for shares during an initial public offering (IPO) or other securities issues. It helps in determining the price at which securities will be offered.

What are the steps in book building?

In book building, the company appoints book runners and drafts a Red Herring Prospectus (RHP) for SEBI approval. Post-approval, it conducts road shows, announces a price band, and initiates a bidding process where investors indicate their share price and quantity. The final issue price is then determined, and shares are allotted.

What are the types of book building?

There are mainly two types of book building: fixed price book building, where the issue price is predetermined, and book building through price discovery, where investor bids help determine the final issue price.

What is the 75% book building process?

The 75% book building refers to a rule in some markets where at least 75% of the securities offered must be allocated to qualified institutional buyers (QIBs) in an IPO, ensuring that institutional investors subscribe a significant portion of the issue.

What comes under book building?

Book building includes the entire price and demand discovery process for a security issue. It encompasses everything from preparing the draft prospectus to finalizing the number of shares issued and their cost, based on investor bids.

What is the book building period?

The book-building period is when the book is open for investors to submit their bids for the shares being issued. It usually lasts a few days, during which the investor demand and price for the issue are finalized.

Where is book building used?

Book building is predominantly used in initial public offerings (IPOs). Still, it can also be applied in follow-on public offerings (FPOs) and other securities issuances where price and demand discovery is needed. It’s a common practice in many stock exchanges around the world.

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