What is the Book Building Process in an IPO?

The book-building process in Initial Public Offerings (IPOs) determines the pricing of shares. In this process, investors’ bids are collected to identify the demand for the shares being offered. Moreover, it ensures that the share prices are correctly set according to their actual market values. In India, this procedure is widely adopted and it is necessary for anyone who wants to understand IPOs and the pricing of shares before they come to the stock market. In this blog, you will come to know what is book building IPO, its process, sub-types, advantages, and more.

Key Highlights

• Book building is a mechanism where share prices are determined by the demand from investors, making sure that they reflect the true market price of the shares.

• It involves collecting bids from investors, evaluating demand, and determining a reasonable price through a weighted average that is used to allocate shares.

• By increasing transparency and fairness, book building increases investor confidence by making them realise that market forces determine share prices.

• In India, SEBI oversees the book-building procedure to provide a systematic and transparent method for determining share prices at initial public offerings (IPOs).

What Is Book Building In IPO?

When a company raises funds using book building, the share price for the public is decided by reviewing bids from other investors. These investors include foreign portfolio managers and qualified institutional investors. Moreover, an underwriter may be hired for this process.

Furthermore, the process is called “book building” because the underwriter creates a book of bids from institutional investors. After bidding, the final cutoff is made by using a weighted average considering the market demand for shares.

Steps for Book Building Process of IPO?

To initiate the IPO book-building process, there are some steps that you need to follow. Let’s discuss them in brief: 

Step 1: Appointment of Intermediaries – In the book-building method, the issuer appoints lead managers or book runners to manage the book-building process. These intermediaries help decide the offer price, advertise the issue, and allot shares.

Step 2: Filing of the Draft Offer Documents – A draft offer document is filed with the relevant regulatory authority by the issuer. This contains information about the company, its workings, finances, and the offer to be made.

Step 3: Marketing and Roadshows – The marketing and roadshows are conducted by the lead managers to gather the investor’s attention and educate possible investors on the offer.

Step 4: Bidding Period – On a specific date determined by the issuer, bidders can present their bids to acquire these securities. The offered price and the number of requested shares are part of this process.

Step 5: Price Discovery – According to the bids received by the lead managers, investor demand is assessed. Hence, the final price of the offer is determined within the specified price range as per the offer document.

Step 6: Allocation of Securities – When the offer price becomes established, securities are allocated among the investors as per their bids where preference is given to institutional investors and high-net-worth individuals.

Step 7: Listing and Trading – Once the allocation process has been concluded, stocks are made available for trading on the stock exchange. Thereby facilitating their circulation into a secondary market, devoid of direct interactions with primary investors.

Are There Any Subtypes Of The Book Building Process IPO?

The process of building a book for IPO can be classified into subtypes which have their specific ways of pricing and assessing demand. Let’s discuss them in brief:

Accelerated Book Building

This happens in a scenario where there is an urgent need for money by the firms. To do this, the firm approaches an investment bank for underwriting roles. The bank uses its networks to identify institutional investors or high-net-worth individuals (HNIs). These investors make their offers one after another and allocation follows immediately.

Partial Book Building Process

Partial book-building issues may be exclusive to a select number of investors recommended by the issuer or underwriter. The bidders’ weighted average determines the IPO price outlined in the prospectus. It is done so that the IPO can then be opened to retail investors. Retail investors have no alternative but to treat it as a fixed-price issue because its cut-off price has once been set. Moreover, bids are normally made within a selected group of investors during partial book-building issues.

Why Do Companies Opt For Book Building IPO?

Many corporations have decided on the book-building IPO process because of its capacity to keep track of the current market trends in demand and set up a just-total price per share. However, there are other as well why companies opt for book building. Let’s discuss them in brief.

Market-Driven Pricing

Share prices are based on what investors want. The book-building process considers these desires and looks at how the company is doing in the market at certain times. Therefore, the price of the shares would be a true reflection of their current worth in terms of grades when they are offered to the people.

Investor Confidence

With its transparency and fairness, book building can promote trust in investors. and boost their confidence. This process helps investors understand that the price is set by market forces and not arbitrarily decided by the company.

Reduced Underpricing

Constant pricing may lead either to under or over-pricing resulting in high volatility in price post IPO. Whereas, book building minimises these risks because it makes the issue price closer to what the market is willing to pay. Thus, minimising the post-IPO performance fluctuations.

Better Allocation of Shares

This process enables firms to distribute stocks among various categories of equity holders in a more effective manner. This results in a greater degree of share allocation balance. 

Regulatory Support

In India, SEBI has established clear regulations regarding the book building process. Thereby regulating this process through mechanisms that make it a well-structured pricing method for IPOs.

Market Feedback

Throughout the process of creating a book, firms will get feedback from possible financiers. Such remarks may show what investors expect or how they feel about an industry. These comments can be essential for any corporation’s plans and choices in the upcoming years.

Advantages Of IPO Book Building

The IPO book-building method has various advantages which make it the best choice for fixing the share price so that it indicates the market demand more realistically. Let’s discuss its advantages in brief: 

• Helps determine the price of securities and aids in identifying the intrinsic value of shares.

• The issuing company gets to choose the type of investors.

• The process leads to conserving finances. This is because money is not wasted on advertising and marketing.

• A logical explanation for determining how much to sell shares at will depend on their demand in the marketplace.

• It informs the public about bidding in a more transparent manner.

Difference Between Fixed-Pricing And Book-Building

The understanding of fixed pricing and book-building is essential because these methods help determine the prices of shares during an IPO differently. Here’s a table that shows their comparison in brief:

Conclusion

In initial public offerings, the book-building process is a technique used to set stock prices according to the demand from the market. This involves obtaining offers from several investors, such as institutional and high-net-worth individuals, and then determining a fair price based on these offers. Moreover, through a systematic approach, firms can achieve price discovery through the market, improve investor trust, and better share allocation. In India’s financial industry, book building has become a favoured option in stock pricing that offers regulatory provisions and transparent processes.

FAQs on Book Building Process