Price mechanism

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Price mechanism is an economic term that refers to the manner in which the prices of
commodities affect the demand and supply of goods and services. Price mechanism affects both
buyers and sellers who negotiate prices of goods or services.[1] A price mechanism or marketbased mechanism refers to a wide variety of ways to match up buyers and sellers through price
rationing.
An example of a price mechanism uses announced bid and ask prices. Generally speaking, when
two parties wish to engage in a trade, the purchaser will announce a price he is willing to pay
(the bid price) and seller will announce a price he is willing to accept (the ask price).
The primary advantage of such a method is that conditions are laid out in advance and
transactions can proceed with no further permission or authorization from any participant. When
any bid and ask pair are compatible, a transaction occurs, in most cases automatically.[2]

Contents
[hide]

1 Effects of the price mechanism

2 Stock market

3 Auctions

4 Other applications

5 See also

6 References

Effects of the price mechanism[edit]

Price Mechanism causes many changes in the economic environment. If there is an increase in
demand, then prices will go higher causing a movement along the supply curve.[3] An example of
price mechanism in the long term is the oil crisis during the 1970s.

The crisis caused more nations to start producing its own oil due to dramatic price increases of
oil. Since more nations started to produce oil, the supply curve shifted more to the right meaning
there was more supply of oil.
Price Mechanism affects every economic situation in the long term. Another good example of
price mechanism in the long run is fuel for cars. If fuel becomes more expensive, then the
demand of fuel would not decrease fast but eventually companies will start to produce
alternatives such as biodiesel fuel and electrical cars.[4] Price mechanism is a system by which the
allocation of resource and distribution of goods and services are made on the basis of relative
market price

Stock market[edit]
When trading in a stock market, a person who has shares to sell may not wish to sell them at the
current market price (quote). Likewise, a person who wishes to buy shares may not wish to pay
the current market price either. Some negotiation is necessary in order for a transaction to occur.
The negotiation often comes in the form of adjusting the bid prices and the ask prices as the
value of the share goes up and down. For example, if the share is worth $10, a buyer may "bid"
$9.97 (3 cents less), and a seller may ask for $10.02 (2 cents more). If the value of the stock goes
down, a seller may be forced to reduce his asking price. Conversely, if the value of the stock
goes up, a buyer may be forced to increase his bidding price.
Most of the time, the bid and ask prices remain very close to the market value of the share, often
separated by only a couple of cents. The difference between the bid and ask price is called the
Bid/ask spread.
In actual trading, the parties involved might use a limit order to specify which bid or ask price he
wishes to trade at. The trader specifies the number of shares and his bid/ask price (depending on
whether he is buying or selling). Such orders can have execution limits, such as "by end of day"
or "all or nothing".

Auctions[edit]
Start
Date

End Date

Zen Tech

09-05-2013

25-10-2013

Mastek

26-11-2012

31-10-2013

Gradiente Info

22-01-2013

Crompton Greav
Aptech

Scrip Name

Offer Price ( )

Face Value

Type of Issue

Issue

10.00

BuyBack

175.00

5.00

BuyBack

02-01-2014

16.00

10.00

BuyBack

16-07-2013

15-01-2014

125.00

2.00

BuyBack

24-07-2013

23-01-2014

82.00

10.00

BuyBack

Start
Date

End Date

KRBL

04-03-2013

11-02-2014

35.00

1.00

BuyBack

Panama Petro

20-03-2013

13-02-2014

160.00

10.00

BuyBack

Eclerx Serv

27-08-2013

26-02-2014

825.00

10.00

BuyBack

Great Eastern Sh

02-09-2013

28-02-2014

279.00

10.00

BuyBack

JBF Inds

04-09-2013

03-03-2014

105.00

10.00

BuyBack

Shri Dinesh-$

28-03-2013

08-03-2014

10.00

BuyBack

Jindal Steel

16-09-2013

15-03-2014

1.00

BuyBack

Nitin Fire

20-09-2013

19-03-2014

2.00

BuyBack

Maharashtra Seam

14-05-2013

07-04-2014

300.00

5.00

BuyBack

HT Media

03-06-2013

13-05-2014

110.00

2.00

BuyBack

INFINITE

20-06-2013

04-06-2014

120.00

10.00

BuyBack

Pennar Inds-$

24-06-2013

09-06-2014

40.00

5.00

BuyBack

Motilal Oswal

08-07-2013

09-06-2014

90.00

1.00

BuyBack

S Mobility-$

10-07-2013

18-06-2014

Scrip Name

Offer Price ( )

261.00

Face Value

Type of Issue

Issue

Main article: Auction

An auction is a price mechanism where bidders can make competing offers for a good. The
minimum bid may or may not be set by the seller, who may choose to predetermine an ask price.
The highest bidder, or the first one to reach a preset ask price, would be awarded the transaction.

Other applications[edit]
If the terms "pay" and "sell" are understood very generally, then, a very broad range of
applications and different market systems can be enabled this way. Internet dating for instance
could be based on offers to talk for a period of time, accepted by those who are compensated not
in money but in additional credits to keep using the system. Or, a political party could trade
support for different measures in a platform, perhaps using allocation voting to "bid" a certain
amount of support for a measure that a leader has "asked" them to support: if the measure has
enough support in the party, the leader will proceed; a very explicit model of so-called "political
capital".
Though there are many concerns about liquidating any given transaction, even in a conventional
market, there are ideologies which hold that the risks are outweighed by the efficient rendezvous.
In greenhouse gas emissions trading, companies doing the "bidding" argue that Earth's
atmosphere can be seen as affected almost uniformly by emissions anywhere on Earth. They
argue further that, as a result, there are almost no local effects, and only a measurable and widely
agreed climate change effect, of a greenhouse gas emission, justifying a "cap and trade"
approach. Somewhat more controversially, the approach was applied even earlier to sulfur
dioxide emissions in the United States, and was quite successful in reducing overall smog output
there.
In most applications of such methods, however, the comprehensive outcome of the transaction is
not so easily measured or universally agreed. Some theorists assert that, with appropriate
controls, a market mechanism can replace a hierarchy, even a command hierarchy, by ordering
actions for which the highest bid is received:
An infamous example is the assassination market proposed by Timothy C. May, which were
effectively bets on someone's death. This has since been generalized into the prediction market
idea which the Pentagon proposed to operate as part of Total Information Awareness; however,
this proved controversial as it would theoretically let assassins predict and then benefit from their
predictions, which they would cause to come true. This is a problem even with the commodity
markets and any other financial markets, where a single person's choices or fate might be
influenced, predicted, or decided by someone already in the market.
Less controversial applications of bid and ask matching include:

industrial process control

various applications in social networks (including dating above)

calculating interest in court judgments or homestead credit

determining which of several assets in a divorce are most prized by each party, and
accordingly, who should receive what for maximum amiability and minimum capital
asset sale and lifestyle disruption

See also[edit]

Price signal

Price system

References[edit]
1.

Jump up ^ Shaw, W.H. (2008). Business Ethics: Sixth Edition. Belmont, Ca: Thomson
Wadsworth

2.

Jump up ^ A seminal article on the firm in relation to transaction costs is R. H. Coase

(1937), "The Nature of the Firm," Economica 4(16), pp. 386405, which has with some 41 uses
of "price mechanism" in it (via cntrl-F: price mechanism), illustrating contexts for its usage.

3.

Jump up ^ Pettinger, T. (n.d.). Price Mechanism in the Long Term. In Economics Help.
Retrieved April 10, 2011, from http://www.economicshelp.org/microessays/equilibrium/pricemechanism-long-term.html

4.

Jump up ^ Pettinger, T. (n.d.). Price Mechanism in the Long Term. In Economics Help.
Retrieved April 10, 2011, from http://www.economicshelp.org/microessays/equilibrium/pricemechanism-long-term.html

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Book Building & Fixed Price 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.
There are two types of Public Issues:

Issue
Type

Offer Price

Demand

Payment

Reservations

Fixed
Price
Issues

Price at which the

securities are offered
and would be allotted
is made known in
advance to the
investors

Demand for the

securities offered
is known only after
the closure of the
issue

100 % advance
payment is required to
be made by the
investors at the time of
application.

50 % of the shares
offered are reserved
for applications below
Rs. 1 lakh and the
balance for higher
amount applications.

Book
Building
Issues

A 20 % price band is
offered by the issuer
within which investors
are allowed to bid and
the final price is
determined by the
issuer only after
closure of the bidding.

Demand for the

securities offered ,
and at various
prices, is available
on a real time
basis on the BSE
website during the
bidding period..

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.

50 % of shares
offered are reserved
for QIBS, 35 % for
small investors and
the balance for all
other investors.

More

About

Book

Building

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:

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

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

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

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

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

Bids have to be entered within the specified price band.

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

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

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.

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.

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Home Public Issues / OFS About Public Issues Reverse Book Building

About Reverse Bookbuilding

Securities and Exchange Board of India has issued the SEBI (Delisting of Equity Shares) Regulations 2009 for
voluntary delisting of equity shares from stock exchanges which provide the overall framework for voluntary delisting
by a promoter or acquirer through a process referred to as Reverse Book Building.
The promoter or acquirer shall appoint a Merchant Banker and also a trading member for placing bids on the online
electronic system. The Merchant Banker and promoter shall make a public announcement and also dispatch a letter
of offer to the public shareholders along with a bidding form. Shareholders may approach the trading member for
placing offers on the on-line electronic system with the bidding form. The shareholders desirous of availing the exit
opportunities are required to tender their shares to the trading members prior to placement of orders. Alternately, they
may
mark
a
pledge
for
the
shares.
The final offer price shall be determined as the price at which the maximum number of shares has been offered. The
promoter shall have the choice to accept / not accept the price. If the price is accepted, the promoter shall be required
to accept all valid offers upto and including the final price. However, if the quantity eligible for acquiring securities at

the final price offered does not result in promoter holding crossing the limits specified in the Regulations, the offer
shall
be
deemed
to
have
failed
and
the
company
shall
remain
listed.
At the end of the offer, the merchant banker to the book building exercise shall announce the final price and the
acceptance (or not) of the price by the promoter. Any remaining public shareholders may tender shares to the
promoter at the same final price upto a period of one year from the date of delisting.
Special provisions have been provided in case of voluntary delisting of small companies. Equity shares of such
companies may be delisted without following the Reverse Book Building process and by following a separate
procedure specified in the Regulations.
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Home Public Issues / OFS About Public Issues Institutional Placement Programme

Institutional Placement Programme

Securities Exchange Board of India (SEBI) vide its notification dated January 30, 2012 has amended the Issue of
Capital and Disclosure Requirements Regulations, 2009 whereby Chapter VIII-A - Institutional Placement Programme
(IPP)
has
been
inserted.
The provisions of this ChaThe provisions of this Chapter shall apply to issuance of fresh shares and or offer for sale
of shares in a listed issuer for the purpose of achieving minimum public shareholding in terms of Rule 19(2)(b) and
19A
of
the
Securities
Contracts
(Regulation)
Rules,
1957.
Definitions:

For the purpose of this Chapter: shares of same class listed and traded in the stock exchange(s);

"eligible seller" include listed issuer, promoter/promoter group of listed issuer;

"institutional placement programme" means a further public offer of eligible securities by an eligible seller, in
which the offer,allocation and allotment of such securities is made only to qualified institutional buyers in terms
of this Chapter.

Conditions for Institutional Placement Programme

An institutional placement programme may be made only after a special resolution approving the institutional
placement programme has been passed by the shareholders of the issuer in terms of section 81(1A) of the
Companies Act, 1956.

No partly paid-up securities shall be offered.

The issuer shall obtain an in-principle approval from the stock exchange(s).

Appointment

of

Merchant

Banker

An institutional placement programme shall be managed by merchant banker(s) registered with the Board who shall
exercise
due
diligence.
Offer Document

The institutional placement programme shall be made on the basis of the offer document which shall contain
all material information.

The issuer shall, simultaneously while registering the offer document with the Registrar of Companies, file a
copy thereof with the Board and with the stock exchange(s) through the lead merchant banker.

The issuer shall file the soft copy of the offer document with the Board, along with the fee.

The offer document shall also be placed on the website of the concerned stock exchange and of the issuer
clearly stating that it is in connection with institutional placement programme and that the offer is being made
only to the qualified institutional buyers.

The merchant banker shall submit to the Board a due diligence certificate, stating that the eligible securities
are being issued under institutional placement programme and that the issuer complies with requirements of
this Chapter.

Pricing and Allocation/allotment

The eligible seller shall announce a floor price or price band at least one day prior to the opening of
institutional placement programme.

The eligible seller shall have the option to make allocation/allotment as per any of the following methods -

proportionate basis;

price priority basis; or

criteria as mentioned in the offer document.

The method chosen shall be disclosed in the offer document.

Allocation/allotment shall be overseen by stock exchange before final allotment.

Restrictions

The promoter or promoter group who are offering their eligible securities should not have purchased and/ or
sold the eligible securities of the company in the twelve weeks period prior to the offer and they should
undertake not to purchase and / or sell eligible securities of the company in the twelve weeks period after the
offer.

Allocation/allotment under the institutional placement programme shall be made subject to the following
conditions:
Minimum of twenty five per cent. of eligible securities shall be allotted to mutual funds and

insurance companies:Provided that if the mutual funds and insurance companies do not subscribe to said
minimum percentage or any part thereof, such minimum portion or part thereof may be allotted to other
qualified institutional buyers;
No allocation/allotment shall be made, either directly or indirectly, to any qualified institutional buyer

who is a promoter or any person related to promoters of the issuer:Provided that a qualified institutional
buyer who does not hold any shares in the issuer and who has acquired the rights in the capacity of a
lender shall not be deemed to be a person related to promoters.

The issuer shall accept bids using ASBA facility only.

The bids made by the applicants in institutional placement programme shall not be revised downwards or
withdrawn.

Explanation
Qualified Institutional Buyers belonging to the same group shall have the same meaning as derived from sub-section
(11)
of
section
372
of
the
Companies
Act,
1956.
Restrictions on size of the offer

The aggregate of all the tranches of institutional placement programme made by the eligible seller shall not
result in increase in public shareholding by more than ten per cent. or such lesser per cent. as is required to
reach minimum public shareholding.

Where the issue has been oversubscribed, an allotment of not more than ten percent of the offer size shall
be made by the eligible seller.

Period of Subscription and display of demand

The issue shall be kept open for a minimum of one day or maximum of two days.

The aggregate demand schedule shall be displayed by stock exchange(s) without disclosing the price.

Withdrawal

of

offer

The eligible seller shall have the right to withdraw the offer in case it is not fully subscribed.
Transferability

of

eligible

securities

The eligible securities allotted under institutional placement programme shall not be sold by the allottee for a period of
one year from the date of allocation/allotment, except on a recognised stock exchange
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Home Public Issues / OFS About Public Issues Glossary

Glossary
Bid A bid is the demand for a security on behalf of an investor that is entered by the syndicate/sub-syndicate
members in the system. The two main components of a bid are the price and the quantity.
Bidder

The

person

who

has

placed

bid

in

the

Book

Building

process.

Book Running Lead Manager The lead merchant bankers appointed by the Issuer Company are referred to as the
Book Running Lead Managers. The names of the Book Running Lead Managers are mentioned in the offer document
of
the
Issuer
Company.
Floor Price The minimum offer price below which bids can not be entered. The Issuer Company in consultation with
the
Book
Running
Lead
Managers
fixes
the
floor
price.
Merchant Banker An entity registered under the Securities and Exchange Board of India (Merchant Bankers)
Regulations,
1999.
Syndicate Members The Book Running Lead Managers to the issue appoint the Syndicate Members, who enter the
bids of investors in the book building system. Syndicate Members are intermediaries registered with SEBI who also
carry
on
the
activity
of
underwriting.
Order Book It is an 'electronic book' that shows the demand for the shares of the company at various prices on a real
time basis.
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