What Is Book building in an IPO?

Book building in an IPO is a method of determining the IPO price based on investors' bids and market demand, unlike a fixed-price issue, where the company sets the price and investors bid at that price.

A book-building IPO lets investors submit bids within a specified range, helping the company and its intermediaries gauge market demand before setting the final price.

This article explains what book-building in an IPO is, its process, advantages, regulatory requirements, and more.

What is Book-building in an IPO?

Book-building in an IPO is a price-discovery mechanism in which investors bid for shares within a specified price range. In the book-building process, the issuing company, along with its Book Running Lead Managers (BRLMs), sets a price range with a floor price and a cap price.

Investors place their bids specifying the quantity and price. The BRLM records these bids in an order book. After the bidding process closes, the final issue price is decided based on the collected bids, considering the demand at various price levels.

The book-building process is transparent, and market demand helps determine the price. That’s why it is widely used in mainboard IPOs.

Also Read: Types of IPO

How Does the Book Building Process Work?

The book building process involves the following steps:

• The issuing company appoints the book-running lead managers, who oversee the entire IPO process.

• The company and lead manager set the price range, with the lowest price as the floor price and the highest price as the cap price.

• The Draft Red Herring Prospectus (DRHP) is filed with SEBI and includes all issue details except the final price.

• The Red Herring Prospectus is issued before the IPO starts.

• Investors place bids within the price band, specifying price per share and quantity.

• After the bidding period, the company and BRLM analyse demand.

• The final price, called the cut-off price, is determined based on the highest demand level.

• All investors who bid at or above the cut-off price are allotted shares.

• If the issue is oversubscribed, investors may receive fewer shares than they applied for, and the company processes refunds for excess bid amounts.

Also Read: Difference Between Fixed Price Issue and Book Building Issue

Why Do Companies Prefer the Book Building Process?

Companies prefer book building because it provides a structured approach to discovering an appropriate IPO price based on investor demand. It can help issuers understand market sentiment before finalising the price.

The process also allows institutional and other investors to participate in price discovery. Strong demand at higher price levels may support a higher final issue price, while weaker demand can indicate that pricing expectations need to be adjusted.

Book building can therefore provide greater flexibility compared with a fixed-price issue, in which the price is determined before investors submit their applications.

Advantages of Book Building in IPO

Here are the advantages of Book Building in IPO:

• Demand assessment:

Investors can observe bidding patterns and subscription levels to understand the market demand for an IPO.

• Price discovery:

The process helps determine an IPO price based on actual investor demand rather than relying entirely on predetermined valuation assumptions.

• Flexible bidding:

Investors can choose their preferred bidding price within the announced price band, subject to applicable IPO rules.

• Market participation:

The process allows different investor categories to participate in the IPO according to their prescribed allocation limits.

• Better transparency:

The bidding process provides a structured mechanism for collecting investor demand before determining the final issue price.

Regulatory Requirements for Book Building in IPO

The Securities and Exchange Board of India (SEBI) provides book building guidelines for companies:

• The issue must be fully underwritten to ensure that all shares are sold.
• The price range cap cannot exceed 20% of the floor price.
• The company may revise the price band during the IPO, but must provide a mandatory three-day extension.

Stock Exchange Regulations for Book Building in IPO

• The IPO must be listed on a recognised stock exchange, such as the NSE or BSE, within three days of the closure.
• The book-building process must be transparent, with real-time online bidding available.
• Anchor investors must hold 50% of their shares for a lock-in period of 30 days and the remaining shares for 90 days.

FAQs

How is the book-building process better than the fixed-price instrument?

It is so because the chances of overpricing and underpricing are high, and there is less efficiency in the fixed-price tool of price determination.

What is 100% book building?

It is a process wherein 100% of the shares are reserved for promoters or employees of the companies.

What is the floor price?

The floor price refers to the minimum amount of the price range at which investors can bid for an IPO. Below this price, applications of the applicants are ignored.

What is the bid price?

The bid price refers to the price that a buyer is willing to pay for a specified number of shares at a certain point in time.

Are there any limitations to the process?

The process has certain limitations, such as the issuer company must be very strong, the process works better in mature market conditions, etc. But still, it is considered more efficient than the fixed-price method and is widely used.