What Is Book Building?

An Initial Public Offer (IPO) is a company’s first sale of stock/shares to the public in the primary market. Companies may raise capital in the primary market by way of an initial public offer, rights issue or private placement. IPO can be made through the fixed price method, book building method or a combination of both.

It is the process of fixing the price of a share based on applicants’ bids. It refers to the collection of bids from investors based on a floor price (minimum price) which is indicated before the opening of the bidding process. The issue price is fixed after the bid’s closing date.

Price Band-Floor Price And Cap Price: Floor price is the minimum price at which bids can be made and cap price is the maximum price one can bid for. For example, when Reliance Power offered their IPO, the price band was between Rs 405 (floor price) and Rs 450 (cap price) per share. Once the band is fixed, investors cannot bid for a price less than floor price or more than the cap price.

Cut-Off : If the investors are not sure about the price to bid and are ready to accept any price (in the price band) fixed by the company then they can write ‘cut-off’ on the application in the space provided. It means the investor is willing to buy at the final price determined by the company at the conclusion of the book building process. In this case the investors have to pay the floor price (Rs 405 per share) at the time of application and if the price discovered is higher, the balance needs to be paid once allocation is confirmed to the investor.

What Is The Difference Between Book Building And Normal Price?

The price at which securities will be allotted is not known in case of a book building offer. And in case of a normal public issue the price is known in advance to the investor. In case of book building, the demand can be known every day as the book is built. In case of a normal public issue, the demand is known only at the close of the issue.

In case of an issuer company makes an issue of 100 per cent of the net offer to public through 100 per cent book building process.

1. Not less than 35 per cent of the net offer to the public shall be available for allocation to retail individual investors. 
2. Not less than 15 per cent of the net offer to the public shall be available for allocation to non institutional investors i.e. investors other than retail individual investors and Qualified Institutional Buyers. 
3. Not more than 50 per cent of the net offer to the public shall be available for allocation to QIB.

PROCESS INVOLVED IN PUBLIC ISSUE

The major activities involved in making a public issue of securities before it is launched are as follows:

1) Preparation Of The Prospectus: The lead manager is responsible for the preparation of the prospectus, which is a document that disseminates all the information about the company, the promoters, and the objectives of the issue and has the contents as specified by the registrar of company law. The final prospectus has to be forwarded to SEBI and the listing stock exchanges.

2) Appointment Of The Lead Manager: Before making a public issue of securities the firm should appoint a SEBI-registered merchant banker to manage the issue as a lead manager. He/she is then responsible for all the pre and the post-issue activities, liaison with the other intermediaries and statutory bodies like the SEBI, stock exchanges and the Registrar of Companies (ROC) as also ensure that the securities are listed on the stock exchanges.

3) Appointments Of Intermediaries: The other intermediaries who are involved in the public issue of securities are underwriters, registrars, bankers to the issue, brokers and advertising agencies. Apart from these it also involves promotion of the issue, printing and dispatch of prospectus and application forms, obtaining statutory clearances, filing the initial listing application, final allotment and refund activities. The cost of a public issue ranges between 12-15 per cent of the issue size and can go up to 20 per cent during bad market conditions.
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Who Can Issue Shares?

(1) Any Indian company may make an initial public offer, if:

• It has net tangible assets of at least three crore rupees in each of the preceding three full years (of twelve months each), of which not more than 50 per cent are held in monetary assets.
• It has a track record of distributable profits in terms of section 205 of the Companies Act, 1956, for at least three out of the immediately preceding five years.
• It has a net worth of at least one crore rupees in each of the preceding three full years.
• The aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth, as per the audited balance sheet of the preceding financial year.
• If it has changed its name within the last one year, at least 50 per cent of the revenue for the preceding one full year has been earned by it from the activity indicated by the new name.

(2) An issuer not satisfying any of the conditions stipulated in sub-regulation on

May make an initial public offer if:

• The issue is made through the book building process and the issuer undertakes to allot at least 50 per cent of the net offer to public to qualified institutional ; or
• At least 15 per cent of the cost of the project is contributed by scheduled commercial banks or public financial institutions, of which not less than 10 per cent.

Shall come from the appraisers and the issuer undertakes to allot at least ten percent of the net offer to public to qualified institutional buyers;

• The minimum post-issue face value capital of the issuer is 10 crore rupees; or
• The issuer undertakes to provide market-making for at least two years from the date of listing of the specified securities.

(3) An issuer may make an initial public offer of convertible debt instruments without making a prior public issue of its equity shares and listing thereof.

(4) An issuer shall not make an allotment pursuant to a public issue if the number of prospective allottees is less than one thousand.

A due diligence study may be conducted by an independent team of chartered accountants or merchant bankers appointed by the stock exchange, the cost of which will be borne by the company. The requirement of a due diligence study may be waived if a financial institution or a scheduled commercial bank has appraised the project in the preceding 12 months. The project for which the company is raising funds has to be appraised by a public financial institution or a scheduled commercial bank. The appraising agency should also participate to a minimum extent of 10 per cent of the project cost. A new company has to compulsorily issue shares at par, while companies with a track record can issue shares at a premium. Before the advent of SEBI (Securities Exchange Board of India) the prices of shares were valued as per the guidelines issued by the Controller of Capital Issues (CCI).

IPO & INVESTOR CATEGORY

Qualified Institutional Bidders (QIBs): These are domestic and foreign institutions (registered with the SEBI) which are eligible to apply for public offers. These institutions normally apply for very large amounts. These include scheduled commercial banks, mutual funds, foreign institutional investors (FII) registered with SEBI, venture capital funds registered with SEBI, insurance companies registered with the Insurance Regulatory and Development Authority (IRDA), provident funds and pension funds with a minimum corpus of Rs 25 crore.

Retail Investors: These are investors who invest up to a maximum of Rs 2,00,000.

Non-Institutional Investors: These are investors who are neither in the QIB category nor in the retail investors’ category. Therefore, high net worth individuals (HNI) fall into this category. 

SEBI issues guidelines which specify the percentage of the total securities offered for each category of investors from time to time. Currently, in any IPO, the allocation is usually as under:

QIB – 50 per cent
HNI – 15 per cent
Retail – 35 per cent