What is book building issue?

Book building is basically a process used in initial public offering (IPO). Through IPO, companies can raise capital by selling their securities in the primary market. The objective of a book-building process is to identify the price that the market is willing to pay for the securities being issued by the company. 

SEBI guidelines define book building as ‘a process undertaken by which, demand for the securities proposed to be issued by a body corporate is elicited and built-up while 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’. 

In this process, either a floor price i.e. base price or a price band (price range starting from floor price to cap price, which cannot be more than 20 per cent) is specified within which, investors can bid. When the issue opens, investors put in bid applications specifying the price and the number of securities at that price. 

The issuer, in consultation with the book running lead manager, will decide on the cut-off price, which is the price at which, the issue gets subscribed. All allottees, who bid at or above the cut-off price are successful bidders and are eligible for allotment in the respective categories while the rest get refunded. The process is completed when final prospectus with all the details including the final issue price and the issue size is filed with the Registrar of Companies (ROC).

Reservations to different categories of investors such as qualified institutional buyers, mutual funds, etc. are required to be made during the course of the issue. 

This process is different from fixed-price issue, where the company decides on the price at which the shares will be issued. Thus, investors know the price at which the shares will be allotted to them right at the time of making the application.