IPO & Book Building

Submitted to:
Prof. Mahesh Renguntwar

Submitted by:
Prem Kumar Nayak (15043)
Anurag Mishra (15044)
Ritesh Raj Verma (15045)
Gaurav Dwivedi (15046)
Gaurav Kumar (15047)

What is an IPO?
An initial public offering (IPO) is the first sale of stock by a

company to the public.

An initial public offering (IPO) occurs when a company first
sells common shares to investors in the public. Generally,
the company offers primary shares this way, although
sometimes secondary shares are also sold as IPOs.
Broadly speaking, companies are either private or public.
Going public means a Company is switching from private
ownership to public ownership.

Why IPO is done?

New capital
Almost all companies go public primarily because they need

money to expand the business

Future capital
Once public, firms have greater and easier access to capital
in the future
Mergers and acquisitions
Its easier for other companies to notice and evaluate a
public firm for potential synergies
IPOs are often used to finance acquisitions

SEBI Guidelines for

IPO
1.

2.
3.

It must have a pre-issue net worth of not less than Rs. 10,000,000
(Rupees One crore) in 3 out of the preceding 5 years, with a minimum
net worth to be met during the 2 immediately preceding years.
It must have a track record of distributing dividends for at least 3 out
of the immediately preceding 5 years, and
The issue size, i.e., the offer through the offer document, the firm
allotment and the promoters contribution through the offer
document, should not exceed five times the pre-issue net worth as
per the last available audited account, either at the time of filing the
draft offer document with the Securities and Exchange Board of India
(SEBI) or at the time of opening of the issue.

.If the above conditions are not satisfied, then the IPO can be made only

through a book-building process, provided that sixty percent (60%) of

the issue size must be allotted to Qualified Institutional Buyers (QIBs).

Book Building
Book Building is basically a process used in Initial Public

Offer (IPO) for efficient price discovery. It is a mechanism

where, during the period for which the IPO is open, bids are
collected from investors at various prices, which are above
or equal to the floor price. The offer price is determined
after the bid closing date.
SEBI guidelines defines Book Building as "a process
undertaken by which a demand for the securities proposed
to be issued by a body corporate is elicited and built-up and
the price for such securities is assessed for the
determination of the quantum of such securities to be
issued by means of a notice, circular, advertisement,
document or information memoranda or offer document".

SEBI Guidelines
As per SEBI guidelines, an issuer company can issue securities
to the public through prospectus in the following manner:
100% of the net offer to the public through book building

process
75% of the net offer to the public through book building
process and 25% at the price determined through Fixed Price.
The Fixed Price portion is conducted like a normal public issue
after the Book Built portion, during which the issue price is
determined.
The concept of Book Building is relatively new in India. However
it is a common practice in most developed countries.

How to invest?
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.

How to invest?(contd.)
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.

Risk, Benefits &

Drawbacks
RiskThe issuer's management gives its view on the Internal and external
risks faced by the company. The company also makes a note on
the forward-looking statements. This information is disclosed in the
initial pages of the document and it is also clearly disclosed in the
abridged prospectus.
BenefitsThe price of an instrument is set in much more realistic fashion. The
primary aim of book building process is to fix the highest market
price for shares and securities. As investors have a voice in the
pricing of the issue, they have a greater certainty of being allotted
what they demand. The issue price is determined by the market.
DrawbacksBook building is suitable only for mega issues. The issuer firm must
be fundamentally strong and well known to the investors. The book
building system functions very well in matured market conditions.
So, the investors are knowledgeable of the various parameters
influencing the market price of the securities.

Taxation
Besides other benefits, both BSE and NSE SME Exchange have
a lot to offer in the form of Tax Benefits. Some of the tax
benefits
are listed
below:
Sl.
Capital
Gain
Unlisted
Listed
No.

Tax

1.

Long-term Capital Gains

20%

NIL

2.

Short-term Capital Gains

30%*

15%

* depending upon assesses income slab

In case of listed share securities transaction tax (STT) must
have been paid.
Min & Max investment limitsThe firm issuing the shares declares a price band. When a firm
is offering shares to the public via book building process, it
sets a price band that defines the minimum and maximum
price limits at which investors can make bids for acquiring
the shares of the company. The floor price signals the
minimum price at which the investors may bid for the shares,
cap is the maximum price at which investors can make bids.

WithdrawalThe ability to withdraw IPOs when demand is weak increases

expected proceeds and provides issuers with option value. To
enhance this value, the SEC adopted in 2001 the public-toprivate safe harbor Rule 155 and simplified Rule 477 for
withdrawing offerings. The option value can exceed the
underpricing associated with soliciting investor demand. Hence,
issuers might prefer bookbuilding despite the associated
underpricing even if they could sell via fixed price at full expected
value. The option value increases faster than underpricing with ex
ante uncertainty, generating predictions regarding the use of
bookbuilding and the timing of IPOs, and leading to a distinct
theory of hot IPO markets.

Target audience/InvestorsAnybody can invest in an initial public offering.

Comparison with nearest

product-

Issue Type

Offer Price

Demand

Payment

Fixed Price Issues

Price at which the securities

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

100 % advance payment is

Demand for the securities
required to be made by the
offered is known only after the
investors at the time of
closure of the issue
application.

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.

Reservations

50 % of the shares offered are

reserved for applications
below Rs. 1 lakh and the
balance for higher amount
applications.

50 % of shares offered are

reserved for QIBS, 35 % for
small investors and the
balance for all other investors.