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Book Building IPO

is the most popular and coveted process all over the globe through which companies float their IPOs in the primary market. Final price of the IPO gets discovered only after the bidding process and hence is not prefixed. This article would help the readers to get an overview on book building method and would help them to make informed IPO investment.

Introduction
Initial Public Offerings are issued to the primary market in various ways among which the most popular one is through book building process. This process utilizes the market forces for price discovery of the IPO.

Book Building IPO - In a Nutshell


According to the Book building method, the IPO issuing company doesn't fix the price in advance, rather gives a price band to the investors within which they are entitled to bid. The investors, in turn, bid for the same by stating the quantity as well as the price of the IPO shares at which they are interested to purchase. IPO's final price is then determined on the basis of all the bid prices.

Participants of Book Building IPO

Institutional Investors Foreign Institutional Investors (FIIs) and MFs (Mutual Funds) HNI (High Networth Individuals) These individuals buy IPOs at large quantities. Retail Investors These are the common investors whose maximum investment limit is Rs. 50,000. Process of Book Building IPO A company issuing an IPO through book building method follows the following steps:

A leading merchant banker is nominated by the IPO issuing company for book building, known as Book-Runner. The concerned company then announces the total number of IPO shares that it is willing to issue along with the price range/band. Investors are then allowed to bid for these issued shares for a limited time period. Investors place their preferences (that is, quantity and price of IPO shares) through a broker. brokers place these bids/orders on behalf of their clients through the electronic media into an electronic book where they are stored. These stored bids are henceforth evaluated by the merchant banker along with the IPO issuing company on the basis of certain criteria such as earliness of bid, aggression of price, quality of investor and many more. A cut-off price is then decided by accepting the lowest price at which all the IPO securities can be disposed off. IPOs are then allotted to those investors whose bid prices are above the cut-off mark until the IPO shares get exhausted. Conclusion Book building method is considered more transparent and market determined than the fixed price IPOs. Here the IPO issuing price is not pre-determined and is discovered only after the closing of bidding period. That is why book building is the most popular method to the companies for issuing their IPOs to the primary market all through the world.

Book building refers to the process of generating, capturing, and recording investor demand for shares during an IPO(Initial public offering)(or other securities during their issuance process) in order to support efficient price discovery.[1] Usually, the issuer appoints a major investment bank to act as a major securities underwriter or bookrunner. The book is the off-market collation of investor demand by the bookrunner and is confidential to the bookrunner, issuer, and underwriter. Where shares are acquired, or transferred via a bookbuild, the transfer occurs off-market,

and the transfer is not guaranteed by an exchanges clearing house. Where an underwriter has been appointed, the underwriter bears the risk of non-payment by an acquirer or non-delivery by the seller.

Book building is a common practice in developed countries and has recently been making inroads into emerging markets as well. Bids may be submitted on-line, but the book is maintained off-market by the bookrunner and bids are confidential to the bookrunner. The price at which new shares are issued is determined after the book is closed at the discretion of the bookrunner in consultation with the issuer. Generally, bidding is by invitation only to clients of the bookrunner and, if any, lead manager, or co-manager. Generally, securities laws require additional disclosure requirements to be met if the issue is to be offered to all investors. Consequently, participation in a book build may be limited to certain classes of investors. If retail clients are invited to bid, retail bidders are generally required to bid at the final price, which is unknown at the time of the bid, due to the impracticability of collecting multiple price point bids from each retail client. Although bidding is by invitation, the issuer and bookrunner retain discretion to give some bidders a greater allocation of their bids than other investors. Typically, large institutional bidders receive preference over smaller retail bidders, by receiving a greater allocation as a proportion of their initial bid. All bookbuild ing is conducted off-market and most stock exchanges have rules that require that on-market trading be halted during the bookbuilding process.

The key differences between acquiring shares via a bookbuild (conducted off-market) and trading (conducted on-market) are: 1) bids into the book are confidential vs transparent bid and ask prices on a stock exchange; 2) bidding is by invitation only (only clients of the bookrunner and any co-managers may bid); 3) the bookrunner and the issuer determine the price of the shares to be issued and the allocations of shares between bidders in their absolute discretion; 4) all shares are issued or transferred at the same price whereas on-market acquisitions provide for a multiple trading prices.

it is one of the meger process the bookrunner collects bids from investors at various prices, between the floor price and the cap price. Bids can be revised by the bidder before the book closes. The process aims at tapping both wholesale and retail investors. The final issue price is not determined until the end of the process when the book has closed. After the close of the book building period, the book runner evaluates the collected bids on the basis of certain evaluation criteria and sets the final issue price.

If demand is high enough, the book can be oversubscribed. In these case the greenshoe option is triggered. 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.

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