Book Building is a process by which corporates determine the demand and the price of a proposed issue of securities through public bidding. The objective is to determine the quantum of the issue on the basis of the price book built. Once the price and the quantum of issue has been determined by the issuer, the issue may either be offered under the private placement of the public offer category, or both, as per the requirement of the SEBI regulations.
Book building involves inviting subscriptions to a public offer of securities, essentially through a tendering process. Eligible investors are required to place their bids for the number of shares to be issued and the price at which they are willing to invest, with the lead manager running the book. At the end of the cut off period, the lead manager determines the response to the issue in terms of the quantum of shares and the highest price at which demand is sufficient to match the size of the issue.
Floor price is the minimum price set by the lead manager in consultation with the issuer. This is the price at which the issue is open for subscription. Investors are free to place a bid at any price higher than the floor price.
The range of price (the highest and the lowest price) at which offer for the subscription of securities is made is known as ‘price band’. Investors are free to bid any price within in the price band.
The investor can place a bid with the authorized lead manager merchant banker. In the case of equity shares, usually several brokers in the stock exchange are also authorized by the lead manager. The investor fills up a bid-cum-application form, which gives a choice to bid for up to three optional prices. The price and demand options submitted by the bidder are treated as optional demands and are not cumulated.
The lead manager, in consultation with the issuer, decides the price at which the issue will be subscribed and proceeds to allot shares to investors who have bid at or above the fixed price. All investors are allotted shares at the same fixed price. For any allottee, therefore the price would be equal to or less than the price bid.
Generally, all investors, including individuals, eligible to invest in a particular issue of securities can participate in the book building process. However, if the issue is restricted to qualified institutional, as in the case of government securities, then, only those eligible can participate.
The procedures relating to the book building process depend on the level at which it is to be taken up by a corporate entity. According to the SEBI, there are two options available to a company either 75 percent or 100 percent book building process. Each of these methods is discussed briefly below:
75 percent Book Building:
The 75 percent book building option of securities is offered on a firm basis where a minimum of 25 percent of the securities is offered to the public.
The following steps are involved in this process:
1) Eligibility: All corporates eligible for public shares are also eligible for raising capital through the book building process.
2) Earmarking securities: Where a decision is taken by a corporate to issue shares through the book building process, the securities to be used should be separately earmarked as the placement portion category in the prospectus. The balance securities must be stated as net offer to the public category.
3) Draft prospectus: A draft prospectus containing all the information except price of the issue must be filed wit the SEBI. Although no precise mention is made, a price band indicating the price range within which securities are being offered for subscription should be indicated. The prospectus is to be filed with the ROC within two days of the issue price being finalized.
4) Appointment of book runner: The issuing company appoints a merchant banker as the book runner, which mentioned in the prospectus. The book runner circulates a copy of the draft prospectus among the institutional buyers who are eligible for firm allotment and to the intermediaries who are eligible to act as underwriters, inviting them to subscribe to the issue of securities. The book runner maintains a record of the names and number of securities ordered by intermediary buyers and the price at which they are willing to subscribe the issue under the placement portion. The book runner collects information about the subscriptions received from underwriters and other intermediaries. After a stipulated time period, the book runner aggregates the subscription so received. The underwriters are required to make a payment of the total amount for the subscription of issues.