How Book Building Came to be in Vogue in India

The introduction of book-building in India in 1995 followed the recommendation of an expert committee appointed by SEBI under Y. H. Malegam "to review the (then) existing disclosure requirements in offer documents. The terms of reference to the committee inter alia included:

1. "the basis of pricing the issue" and

2. "whether substantial reduction was possible in the time taken for processing applications by SEBI."

The committee recommended in November 1995 that the book-building route should be open to issuer companies, subject to certain terms and conditions. Some of the important terms and conditions were:

1. The option should be available only to issues exceeding Rs. 100 crores;

2. The issuer companies could either reserve the securities for firm allotment or avail themselves of the book-building process

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3. Draft prospectus to be submitted to SEBI could exclude information about the offer price;

4. A book runner to be nominated from among the lead market bankers charged with specific responsibilities and the name submitted to SEBI and

5. The requirement of 25 per cent of the securities to be offered to the public will be applicable.

Subsequently based on the experience gained several amendments/revisions to the guidelines were effected by SEBI.

1. In December 1996 the option of book-building was extended to all body corporates which were otherwise eligible to make an issue of capital to the public, and in case of under-subscription, the spill-over from the public portion could be permitted to the placement area and vice-versa.

2. In 1997, the restriction of the facility to 75 per cent of the issue was removed and the facility was extended to 100 per cent of the issue, available only if the issue amount was Rs.100 crores and above, compulsorily offering an additional 10 per cent of the issue size to the public through prospectus, and reserving at least 15 per cent of the issue size to individual investors applying up to ten tradable lots. Further, audited financial ratios had to be disclosed, namely, EPS for last three years, P/E, average return on net worth in last three years and net asset value based on last balance sheet.

However, the 100 per cent book-building facility was not popular. Based on suggestions made by leading merchant bankers, the following amendments were made to the guidelines in 1999:

1. the issuer may be allowed to disclose either the issue size or the number of securities to be offered to the public;

2. allotment should be in demat mode only; and

3. reservation of 15 per cent of issue amount for individual investors need not be made. This could be offered to the public at a fixed price.

The earliest mega issues through the book-building route were those of Larsen & Toubro, ICICI and Tisco.

In January 2000, SEBI updated and thoroughly revised the DIP Guidelines relating to issue of capital, including those on the book-building mechanism. The regulation prescribed a model timeframe for book-building: "After the price has been determined on the basis of bidding, statutory public advertisements for a continuous three days containing, inter alia, the price as well as a table showing the number of securities and the amount payable by an investor, based on the price determined, shall be issued and the interval between the advertisement and issue opening date should be a minimum five days."

The draft prospectus to be circulated has to indicate the price band within which the securities are being offered for subscription. The bids have to be within the price bands. Bidding is permissible only if an electronically-linked transparent facility is used. An issue company can also fix a minimum bid size. An initial bid can be changed before the final rate is determined.

Two of the mega issues, one by Petronet LNG and the other by Biocon, were both through the 100 per cent book-building route. Prospective bidders were advised to read the red herring prospectus carefully. According to the guidelines, a red herring prospectus means a prospectus that does not have complete particulars on the price of securities offered and the quantum of securities offered.

The 2000 Amendment to the guidelines gave legal cloak to the book-building route by allowing circulation of the information memorandum and the red herring prospectus. The information memorandum denotes a process undertaken prior to the filing of a prospectus by which a demand for the securities proposed to be issued by a company is elicited, and the price and the terms of the issue of such securities are assessed by means of a notice, circular, advertisement or document.

In the Next two articles we will study the Regulations of SEBI in Chapter XI of DIP Regulations, for carrying out book building process for a public issue