The concept of book building assumed significance in India as SEBI approved with effect for November 1, 1995, the use of the process in pricing new issues. SEBI issued guidelines under which the options of 100 per cent book building was available only to those issuer companies which are to make an issue of capital of and above Rs 100 crore. Due to these restrictive guidelines, no issue was floated using this mechanism. These guidelines were modified in 1998-99. The ceiling of issue size or book building was reduced from Rs 100 crore to Rs 25 crore. SEBI modified book building norms for public issues in 1999 and allowed the issuer to choose either the existing or the modified mode of book building. Under the modified guidelines (1) compulsory display of demand at the terminals was made optional (2) the reservation of 15 per cent of the issue size for individual investors could be clubbed with fixed price offer; (3) the issuer was allowed to disclose either the issue size or the number of securities being offered; and (4) the allotment of the book built portion was required to be made in Demat mode only.
SEBI modified guidelines for the 100 per cent one stage book building process. Under the new guidelines, a maximum of 60 per cent of the issues was allowed to be allotted to institutional investors and at least 15 per cent to non institutional investors who had applied for more than 1,000 shares. Non-institutional investors include companies, overseas corporate bodies (OCBs), non-resident Indians, high net worth individuals, Hindu undivided families societies and trusts. The remaining 25 per cent could be allotted to small investors on a pro-rata basis. One stage 100 per cent book building was permitted with bidding centers in all cities.
These modifications resulted in an increasing number of issuers adopting the book building route. During 2000-01 (April – October), 12 issues for an aggregate amount of Rs 1256 crore (constituting 40.2 per cent of the total resources raised form the public issue market) were floated using book building mechanism as against four issues aggregating Rs 516 crore (constituting 6.7 per cent of the total resources raised) during 1999-2000.
ICICI was the first to price its debt issue through book building. Other companies such as IPCL, Hindalco, and Hudco, used book building to fix the coupon rate in their bond issues.
Limitations of the Book Building:
The book building method is still at a nascent stage and not without limitations
1) The book building process adopted in India is quite different from that of USA wherein road shows are held and the issue price is arrived at a few hours before the issue opens. The lead manager makes a market in the paper by offering by offering two way quotes on the secondary market, till trading pick up. There are no such provisions in the Indian book building process.
2) In India, unlike in the developed markets, the book building process is still dependent on good faith. The numbers of investors invited to apply are limited and it is the peer pressure and reputation that ensures that there are no defaults. Book building relies on much interaction among forms, merchant bankers, and investors which is absent in India.
3) There is a lack of transparency at critical steps of the book building process and the absence of strong regulation.
4) Since the price for the public portion as well as for the placement portion is the same, issues may not succeed in inviting the desired public response.
5) Advertisements about book issues to retail investors are not necessary. This increases the chances of negotiated deals.
6) It has both proved to be a good price discovery mechanism. Many issues have been listed below their issue price. The lag time of more than 60 days between issue pricing and listing is the building block to price discovery mechanism.
7) Issuers may have to sell cheap due to the collective bargaining power of institutions.
8) High institutionalized holding may affect the stock’s liquidity ad made it volatile as well in case of bulk off lading.
9) The role of retail investors in determining the pricing decreases. Moreover retail investors may not have the information to judge the issue and thus may not be able to arrive at the correct pricing.
10) The limits fixed are fungible and can be altered depending upon market conditions. If there is a low retail demand, more than 75 per cent of the issue size is allocated to institutional investors.
11) Most book built IPOs since 1999 have fared badly on the stock market – 18 out of 19 are currently traded below their issue price. Only Balaji Telefilms is traded at a premium. SEBI needs to re-examine the entire book building process at the operational level and if need be, modify its guidelines.