BOOK BUILDING PROCESS – A Must Read For Every Investor

BOOK BUILDING PROCESS – A Must Read For Every Investor

Dear Readers, pls note that this article is for novice investors, thos who dont know the basic terminologies of market. I have tried to simplify the term Book Building.

I was surprised this year when one of friend was filling up the IPO of Reliance Power. He told me that he is unaware of the term “Book Building” though he listens to this term 100 times a day in advertisements and newspapers.

My this article is for those investors who don’t know the Book Building process. I have taken most the part of this article from www.bseindia.com

Book building acts as scientific method through which a consensus price of IPOs may be deter-mined on the basis of feedback received from most informed investors who are institutional and corporate investors like, UTI, LICI, GICI, FIIs, SFCI etc. The method helps to make a correct evaluation of a company’s potential and the price of its shares.

Book Building is essentially a process used by companies raising capital through Public Offerings-both Initial Public Offers (IPOs) or Follow-on Public Offers ( FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.

The Process:
1) The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'.

2) The Issuer specifies the number of securities to be issued and the price band for the bids.

3) The Issuer also appoints syndicate members with whom orders are to be placed by the investors.

4) The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction.

5) The book normally remains open for a period of 5 days.

6) Bids have to be entered within the specified price band.

7) Bids can be revised by the bidders before the book closes.

8) On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels.

9) The book runners and the Issuer decide the final price at which the securities shall be issued.
Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share.

10) Allocation of securities is made to the successful bidders. The rest get refund orders.

Guidelines for Book Building
Rules governing Book building are covered in Chapter XI of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000.

BSE's Book Building System
BSE offers a book building platform through the Book Building software that runs on the BSE Private network.
This system is one of the largest electronic book building networks in the world, spanning over 350 Indian cities through over 7000 Trader Work Stations via leased lines, VSATs and Campus LANS.
The software is operated by book-runners of the issue and by the syndicate members , for electronically placing the bids on line real-time for the entire bidding period.
In order to provide transparency, the system provides visual graphs displaying price v/s quantity on the BSE website as well as all BSE terminals.