The system of raising public issues through book building process was introduced by SEBI in the year 1996, following the recommendations of Malegam Panel Recommendations, as an alternative and an easier route for corporates to mobilise capital, after the primary market turned sluggish since the year 1995. "Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria. In simple terms, book-building is a mechanism by which the issue price is discovered on the basis of bids received from syndicate members/brokers and not by the issuers/merchant bankers.

SEBI Guidelines define Book Building as a process undertaken by which a demand for the securities proposed to be issued by a corporate body 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. Book should remain open for minimum of 5 days.

Open outcry system cannot be used for book building. As per SEBI, only electronically linked transparent facility is allowed to be used in case of book building.

Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria. The process is carried out as under:

• Decision is taken by the company on the quantum of funds to be raised from the market, by way of equity shares, and the likely timing;

• The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. A draft prospectus, excepting issue price, is prepared and placed with SEBI;

• A the price band for orders (stating the minimum or floor price for bidding orders

• The draft placed with SEBI also indicates that the issue price is to be decided through the book-building process;

• The Issuer also appoints syndicate members with whom orders can be placed by the investors.

• Bids are invited from prospective investors (which is indicative of price range) as to the likely number of shares that they would be ready to subscribe and `the price' at which they will take up subscription;

• Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction.

• A Book should remain open for a minimum of 5 days.

• Bids cannot be entered less than the floor price.

• Bids can be revised by the bidder before the issue closes.

• On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include -

  • Price Aggression

  • Investor quality

  • Earliness of bids, etc.

• The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities.

• Generally, the number of shares are fixed, the issue size gets frozen based on the price per share discovered through the book building process.

• Allocation of securities is made to the successful bidders.

• Twenty-five per cent of the total issue is offered to the public (an element of reservation is also possible);

• The balance 75 per cent can be covered by accepting the bids received at the evaluated price.

The book-building process allows for price and demand discovery. Also, the costs of the public could be kept at minimum, and the time taken for completing the process is relatively shorter than a normal public issue. In a normal public offering, the demand for shares, that is, how many shares will be subscribed for, would not be known in advance.

The likely demand for shares (as also the likely price) can be estimated more realistically under book building, and if there were to be no bids, the issue can even be deferred. Book Building is a good concept and represents a capital market, which is in the process of maturing.

In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner:

1. 100% of the net offer to the public through the book building route.

2. 75% of the net offer to the public through the book building process and 25% through the fixed price portion.

3. Under the 90% scheme, this percentage would be 90 and 10 respectively.

Book Building: means 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. In Book Building securities are offered at prices above or equal to the floor prices, whereas securities are offered at a fixed price in case of a public issue. In case of Book Building, the demand can be known everyday as the book is built. But in case of the public issue the demand is known at the close of the issue

Price at which securities will be allotted is not known in case of offer of shares through book building while in case of offer of shares through normal public issue, price is known in advance to investor. In case of Book Building, the demand can be known everyday as the book is built. But in case of the public issue the demand is known at the close of the issue.