Book Building IPO

Book Building IPO is the most popular and coveted process all over the globe through which companies float their IPOs in the primary market. Final price of the IPO gets discovered only after the bidding process and hence is not prefixed. This article would help the readers to get an overview on book building method and would help them to make informed IPO investment.

Introduction of Book Building IPO:

Initial Public Offerings are issued to the primary market in various ways among which the most popular one is through book building process.

This process utilizes the market forces for price discovery of the IPO.

Book Building IPO – In a Nutshell

According to the Book building method, the IPO issuing company doesn’t fix the price in advance, rather gives a price band to the investors within which they are entitled to bid.

The investors, in turn, bid for the same by stating the quantity as well as the price of the IPO shares at which they are interested to purchase. IPO’s final price is then determined on the basis of all the bid prices.

Participants of Book Building IPO

  • Institutional Investors Foreign Institutional Investors (FIIs) and MFs (Mutual Funds)
  • HNI (High Networth Individuals) These individuals buy IPOs at large quantities.
  • Retail Investors These are the common investors whose maximum investment limit is Rs. 50,000.

Process of Book Building IPO

A company issuing an IPO through book building method follows the following steps:
A leading merchant banker is nominated by the IPO issuing company for book building, known as Book-Runner.
The concerned company then announces the total number of IPO shares that it is willing to issue along with the price range/band.
Investors are then allowed to bid for these issued shares for a limited time period.
Investors place their preferences (that is, quantity and price of IPO shares) through a broker.
brokers place these bids/orders on behalf of their clients through the electronic media into an electronic book where they are stored.
These stored bids are henceforth evaluated by the merchant banker along with the IPO issuing company on the basis of certain criteria such as earliness of bid, aggression of price, quality of investor and many more.
A cut-off price is then decided by accepting the lowest price at which all the IPO securities can be disposed off.
IPOs are then allotted to those investors whose bid prices are above the cut-off mark until the IPO shares get exhausted.

Conclusion

Book building method is considered more transparent and market determined than the fixed price IPOs. Here the IPO issuing price is not pre-determined and is discovered only after the closing of bidding period. That is why book building is the most popular method to the companies for issuing their IPOs to the primary market all through the world.

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