What is an IPO?

An IPO is an abbreviation for Initial Public Offer. When a company goes public for the first time or issues a fresh stock of shares, it offers it to the public directly. This happens in the primary market. The primary market is where a company makes its first contact with the public at large.

What is Book Building?

Book Building is a process used for marketing a public offer of equity shares of a company and is a common practice in most developed countries. Book Building is so-called because the collection of bids from investors are entered in a “book”. These bids are based on an indicative price range. The issue price is fixed after the bid closing date.

How is the book built?

A company that is planning an initial public offer (IPO) appoints a category-I Merchant Banker as a bookrunner. Initially, the company issues a draft prospectus which does not mention the price, but gives other details about the company with regards to issue size, past history and future plans among other mandatory disclosures. After the draft prospectus is filed with the SEBI, a particular period is fixed as the bid period and the details of the issue are advertised.The book runner builds an order book, that is, collates the bids from various investors, which shows the demand for the shares of the company at various prices. For instance, a bidder may quote that he wants 50,000 shares at Rs.500 while another may bid for 25,000 shares at Rs.600. Prospective investors can revise their bids at anytime during the bid period, that is, the quantity of shares or the bid price or any of the bid options. Usually, the bid must be for a minimum of 500 equity shares and in multiples of 100 equity shares thereafter. The book runner appoints a syndicate member, a registered intermediary who garners subscription and underwrites the issue.

On what basis is the final price decided?

On closure of the book, the quantum of shares ordered and the respective prices offered are known. The price discovery is a function of demand at various prices, and involves negotiations between those involved in the issue. The book runner and the company conclude the pricing and decide the allocation to each syndicate member.

When is the payment for the shares made?

The bidder has to pay the maximum bid price at the time of bidding based on the highest bidding option of the bidder. The bidder has the option to make different bids like quoting a lower price for higher number of shares or a higher price for lower number of shares. The syndicate member may waive the payment of bid price at the time of bidding. In such cases, the issue price may be paid later to the syndicate member within four days of confirmation of allocation. Where a bidder has been allocated lesser number of shares than he or she had bid for, the excess amount paid on bidding, if any will be refunded to such bidder.

Is the process followed in India different from abroad?

Unlike international markets, India has a large number of retail investors who actively participate in IPOs. Internationally, the most active investors are the Mutual Funds and Other Institutional Investors. So the entire issue is book built. But in India, 25 per cent of the issue has to be offered to the general public. Here there are two options to the company. According to the first option, 25 per cent of the issue has to be sold at a fixed price and 75 per cent is through Book Building. The other option is to split the 25 per cent on offer to the public (small investors) into a fixed price portion of 10 per cent and a reservation in the book built portion amounting to 15 per cent of the issue size. The rest of the book built portion is open to any investor. What is the advantage of the Book Building process versus the norm.