About Public Issues

Corporates may raise capital in the primary market by way of an initial

public offer, rights issue or private placement. An Initial Public Offer
(IPO) is the selling of securities to the public in the primary market.
This Initial Public Offering can be made through the fixed price method,
book building method or a combination of both.

Fixed price issues are issues in which the issuer is allowed to price
the shares as he wishes. The basis for the price is explained in an offer
document through qualitative and quantitative statements. This offer
document is filed with the stock exchanges and the registrar of
companies.

Features Fixed Price process Book Building process

Pricing Price at which the securitiesPrice at which securities will be
are offered/allotted is offered/allotted is not known in
known in advance to the advance to the investor. Only an
investor. indicative price range is known.
Demand Demand for the securities Demand for the securities offered
offered is known only after can be known everyday as the
the closure of the issue book is built.
Payment Payment if made at the Payment only after allocation.
time of subscription
wherein refund is given
after allocation.

Book Building
About Book Building

Book Building is basically a capital issuance process used in Initial

Public Offer (IPO) which aids price and demand discovery. It is a
process used for marketing a public offer of equity shares of a
company. It is a mechanism where, during the period for which the
book for the IPO is open, bids are collected from investors at various
prices, which are above or equal to the floor price. The process aims at
tapping both wholesale and retail investors. The offer/issue price is
then determined after the bid closing date based on certain evaluation
criteria.

The Process:

• The Issuer who is planning an IPO nominates a lead merchant

banker as a 'book runner'.
• The Issuer specifies the number of securities to be issued and
the price band for orders.
• The Issuer also appoints syndicate members with whom orders
can be placed by the investors.
• Investors place their order with a syndicate member who inputs
the orders into the 'electronic book'. This process is called
'bidding' and is similar to open auction.
• A Book should remain open for a minimum of 5 days.
• Bids cannot be entered less than the floor price.
• Bids can be revised by the bidder before the issue closes.
• On the close of the book building period the 'book runner
evaluates the bids on the basis of the evaluation criteria which
may include -
o Price Aggression
o Investor quality
o Earliness of bids, etc.
• The book runner and the company conclude the final price at
which it is willing to issue the stock and allocation of securities.
• Generally, the number of shares are fixed, the issue size gets
frozen based on the price per share discovered through the book
building process.
• Allocation of securities is made to the successful bidders.
• Book Building is a good concept and represents a capital market
which is in the process of maturing.
Limitations of Book Building Mechanism
Retail investors are not free from certain disadvantages compared to
institutional
investors in Book Building, which does not provide an appropriate price
discovery
mechanism. It is the main reason why small investors have stayed away
from the market.
It needs changes to make it more suitable to the Indian context and the
conditions
prevailing in the Indian capital market.
In the IPOs through the Book-Building route, it would be difficult to find
dubious issues
of the kind that put off investors. The book-building system has various
limitations. Some
of them are as are as follows:

1. Book-building is appropriate for mega issues only. In the case of the

potential investors, the companies can adjust the attributes of the offer
according to the preferences of the potential investors. It may not be
possible in big issues since the risk-return preference of the investors
cannot be estimated easily;

2. The issuer company should be fundamentally strong and well known to

the investors;

3. The book-building system works very efficiently in matured market

conditions. In such circumstances,

4. The investors are aware of the various parameters affecting the market
price of the securities. But, such conditions are not commonly found in
practice;
Green shoe option

In case the issue has been oversubscribed, as was the case with A Ltd,
the company has to exercise a green shoe option to stabilize the post-
listing price. When a particular issue is oversubscribed the appetite of
investors for the stock has not been satisfied and once it gets listed
they tend to pick up the stock from the secondary market.

Since the demand is greater than supply the prices tend to rise way
beyond what the fundamentals of the stock would justify. So in order to
stabilise the post-issue price of the stock, the issuer has to issue more
shares in case of oversubscription.

These shares are taken from the pre-issue shareholders or promoters

and are issued to the investors who have come in through the public
offer on a prorata basis. The green shoe option can be a maximum of
15% of the public offer.

EXAMPLE OF BOOK BUILDING

Let's say a company wants to issue one million shares. The floor price
for one share of face value, Rs 10, is Rs 48 and the band is between Rs
48 and Rs 55.

At Rs 55, on the basis of the bids received, the investors are ready to
buy 200,000 shares. So the cut-off price cannot be set at Rs 55 as only
200,000 shares will be sold. So as a next step, the price is lowered to
Rs 54. At Rs 54, investors are ready to buy 400,000 shares. So if the
cut-off price is set at Rs 54, 600,000 shares will be sold. This still
leaves 400,000 shares to be sold.

The price is now lowered to Rs 53. At Rs53, investors are ready to buy
400,000 shares. Now if the cut-off price is set at Rs 53, all one million
shares will be sold.

Investors who had applied for shares at Rs 55 and Rs 54 will also be

issued shares at Rs 53. The extra money paid by these investors while
applying will be returned to them.