Book

Building
Presented by:
Rajni Sharma
MBA, Final Year
Contents

I. Meaning
II. Concept and Mechanism
III. Types of Book Building
IV. Book Building Process
V. Guidelines Prescribed by SEBI
VI. Limitations
Meaning

 Book Building refers to the collection

of bids from investors, based on a floor
price, which is indicated before the
opening of the bidding process. The
issue price is fixed after the bid closing
date.

 Book Building is a technique used

for marketing a public offer of equity
shares of a company.
 Definition

Book Building is a process of fixing the price for

an issue of securities on the feedback from
potential investors based upon their perception
about the company.
Investment in Securities
 IPO (Initial Public Offer)

 Through Direct market purchase.

(BSE, NSE)
“IPO is when a privately owned
company issues shares of stock to
be sold to the general public.”
Book Building and IPO
 IPO before Book Building
 Buying of shares on fixed price.

 IPO after Book Building

 Share prices between a specified price band

 Price band in the book building process refers to the band

within which the investors can bid. The spread between the
floor and the cap of the price band should not be more than
20%
Difference b/w shares through book
building and normal public issues
Features Fixed Price process
Price at which the
securities are
Pricing
offered/allotted is known in
advance to the investor.
Demand for the
securities offered is
Demand
known only after the
closure of the issue
100 % advance
payment is required to
Payment be made by the
investors at the time of
application.
Book Building process
Price at which securities will be
offered/allotted is not known in
advance to the investor. Only an
indicative price range is known.
Demand for the securities
offered can be known
everyday as the book is
built.
10 % advance payment is
required to be made by the QIBs
along with the application, while
other categories of investors
have to pay 100 % advance
along with the application.
Types of Book Building
75% Book Building
100% Book Building
Types of Investors
 The retail individual investor (RII)----- 35%
 Non-institutional investor (NII)----- 15%
 Qualified Institutional Buyers (QIBs)-----50%

RII is an investor who applies for stocks for a value of not more
than Rs. 100,000.

NIIs are commonly referred to as high net-worth individuals.

QIBs are institutional investors who posses the expertise and

the financial muscle to invest in the securities market.
Division of shares in 100% Book Building
Structure of Book Building
Process of Book Building
How is Book Built in India?
Contd…
Contd…
Contd….
Regulatory Framework
 On the recommendations of Malegam committee, The concept
of Book Building assumed significance in India as SEBI
approved, with effect from November 1, 1995, the use of the
process in pricing new issues.
 SEBI issued the guidelines under which the option of 100%
book-building was available to only those issuer companies
which are to make an issue of capital of and above Rs. 100
crore.
 These guidelines were modified in 1998-99. The ceiling of
issue size was reduced to Rs. 25crore.
 SEBI modified book-building norms for public issues in 1999
and allowed the issuer to choose either the existing or the
modified mode of book building.
Contd…
 Modified Guidelines:-
 Compulsory display of demand at the terminals was made
optional.
 The reservation of 15% of the issue size for individual investors
could be clubbed with fixed price offer.
 The issuer was allowed to disclose either the issue size or the
number of securities being offered.
 The allotment of the book built portion was required to be made
in Demat mode only.
 In April 2000, SEBI modified guidelines for the 100% book-
building process. i.e. a maximum of 60% of the issue was
allowed to Institutional investors and atleast 15% to non-
institutional investors who had applied for more than 1,000
shares.
 Example of Price discovery through
book building:

 ICICI was the first to price its debt issue through book building.
Limitations of Book-Building
 In India, unlike in the developed markets, the Book-building
process is still dependent on good faith. It is the peer pressure
and reputation that ensures that there are no defaults.
 The number of investors invited to apply are limited.
 Book building relies on much interaction among firms,
merchant bankers, and investors, which is absent in India.
 lack of transparency at critical steps of the book building
process.
 Absence of strong regulation.
 More lag time b/w issue pricing and listing.
 Collective bargaining power of institutions.
 High institutionalized holding may affect the stock’s liquidity,
and made it volatile as well.
 The limits fixed are fungible and can be altered depending upon
market conditions.
Thank You