Book building is a method of offering shares to investors in which the issue price is not fixed in advance (as is done in a fixed price offer) but is determined through a bidding process. In a book built offer pricing reflects revealed demand and contemporary market conditions. The mechanism of book building works as follows:
1. The company announces the public issue giving an indicative price band which is determined in consultation with its lead merchant bankers
2. Investors interested in the issue submit the bid-cum application form, mentioning the investor’s price and volume options to syndicate members, who are on an electronic linked platform across the country. The electronic platform of BSE and NSE are used for this purpose. When a bid is submitted, it is uploaded to the NSE/BSE system. The status of the book can be seen on the bidding terminals by investors. Investors can revise their bids any number of times before the bidding period closes.
3. Once the bidding period is over the lead manager ascertains the demand function and decides the issue price and the pattern of allocation in consultation with the issuer. Pricing is generally aimed at ensuring that there is a healthy demand overhang leading to a post listing price that is higher than the issue price. The idea is to leave something on the table for the investors. As far as the allotments is concerned under the existing regulations a minimum of 25 percent has to be allotted to individuals bidding up to 1000 shares, a minimum of 15 percent has to be allotted to corporates, HNIs (High Network Individuals), and individuals. Investors bidding in excess of 1000 shares and a maximum of 60 percent may be allotted to QIBs (Qualified Institutional Buyers such as FIIs, banks and so on). In the event of over-subscription allotment in the 25 percent and 15 percent categories has to be done on a proportionate basis whereas the allotment in the QIB category can be done on a discretionary basis. Typically discretionary allotments is based on the quality of the bid, size of the bid, bid price and bid date.
A right issue involves selling securities in the primary market by issuing rights to the existing shareholders. When a company issues additional equity capital it has to be offered in the first instance to the existing shareholders on a pro rata basis. This is required under Section 81 of the Companies Act 1956. The shareholders, however may by a special resolution forfeit this right partially or fully to enable a company to issue additional capital to the public.
Procedure for Rights Issue: A company making a rights issues sends a letter of offer along with a composite application from consisting of four forms (A, B, C and D) to the shareholders. Form A is meant for the acceptance of the rights and application or additional shares. This firm also shows the numbers of rights shares the shareholder is entitled to. It also has a column through which a request for additional shares may be made. Form B is used if the shareholder wants to renounce the rights in favor of someone else. Form C is meant for application by the renouncee in whose favor the rights have been renounced by the original allottee through Form B. Form D is used to make a request for split forms. The composite application form must be mailed to the company within a stipulated period which is usually 30 days.
Private placements and preferential allotment involves sale of securities to a limited number of sophisticated investors such as financial institutions, mutual funds, venture capital funds, banks and so on. What is the difference between private placement and preferential allotment? In a preferential allotment the identity of investors is known when the issuing company seeks the approval of its shareholders whereas in a private placements, the identity of investors is not known when the offer document (popularly known as the information memorandum) is prepared. In the Indian context we find that broadly (1) private placement refers to sale of equity or equity related instruments of an unlisted company or sale of debentures of listed or unlisted company and (2) preferential allotment refers to sale of equity or equity related instruments of listed company.