Primary Issue: What Is Book Building?

PRIMARY ISSUE
Three
o
o
o
methods to issue primary market

Rights Issue,
Initial Public Offer (IPO)
Private Placement
Free Pricing Regime:

Before 1992, the controller of capital Issues (CCI) used to regulate the new
issues market under the Capital Issues(Control)Act, 1947. Companies had to
obtain approval from the CCI for raising funds in the primary market. The
timing, quantum and pricing of the issue were decided by the controller,
New companies could issue shares only at par, while the existing companies
with substantial reserves could issue shares at a premium. This premium was
based on a prescribed formula set by the CCI.
In 1992, the capital issues (control) Act, 1947 was repealed and all controls
relating to raising of resources from the market were removed. The promoter
and his merchant banker together decide the price of the issue. Both new and
established companies are free to decide the price of their issue.
WHAT IS BOOK BUILDING?
Book Building is the process of determining the price at which an Initial Public
Offering will be offered. SEBI guidelines, 1995 defined book-building as a process
undertaken by which a demand for the securities proposed to be issued by a body
of corporate is elicited and built up and the price for such securities is assessed for
the determination of the quantum of such securities to be issued by means of a
notice, circular, advertisement, document or information memoranda or offer
document.
In general, the word Book building is a method of marketing the shares of a
company whereby the quantum and the price of the securities to be issued will be
decided on the basis of the bids received from the prospective shareholders by the
lead merchant bankers. According to this method, share prices are determined on
the basis of real demand for the shares at various price levels in the market.
Book building is a common practice in developed countries and has recently been
making inroads into emerging markets as well. When companies are on the look out
to raise money for their business operations, they use various means for the same.
Two of the most popular means to raise money are Initial Public Offer (IPO) and
Follow on Public Offer (FPO). During the IPO or FPO, the company offers its shares
to the public either at fixed price or offers a price range, so that the investors can
decide on the right price. The method of offering shares by providing a price range
is called as book building method.
Types of investors
There are three kinds of investors in a book-building issue.
The retail individual investor (RII),
The non-institutional investor (NII)
The Qualified Institutional Buyers (QIBs)
There are two types of Public Issues:
FIXED PRICE ISSUE: - When the issuer at the outset decides the issue price and
mentions it in the offer document, it is commonly known as fixed price issue.
BOOK BUILD ISSUE:-When the price of an issue is discovered on the basis of
demand received from the prospective investors at various price levels, it is called
as book built issue.
BOOK BUILDING PROCESS IN INDIA
Book Building is fundamentally a procedure utilized in IPOs for effective price

discovery. Its a method where, during the time period for which the initial public
offer is open, bids are gathered from traders at different prices, which are higher or
equal to the ground price. The IPO offer price is decided following the bid ending
date.
GUIDELINES BY SEBI
On the recommendations of Malegam committee, The concept of Book

Building assumed significance in India as SEBI approved, with effect from
November 1, 1995, the use of the process in pricing new issues.
SEBI issued the guidelines under which the option of 100%book-building was
available to only those issuer companies which are to make an issue of
capital of and above Rs. 100crore.
These guidelines were modified in 1998-99.The ceiling ofissue size was
reduced to Rs. 25crore.
SEBI modified book-building
and allowed the issuer to
modified mode of book building.
norms for public

choose either the
issues in 1999
existing or the
Modified Guidelines:
Compulsory display of demand at the terminals was made optional.
The reservation of 15% of the issue size for individual investors could be
clubbed with fixed price offer.
The issuer was allowed to disclose either the issue size or the number of
securities being offered.
The allotment of the book built portion was required to be made in Demat
mode only.
In April 2000, SEBI modified guidelines for the 100% bookbuilding process. i.e. a maximum of 60% of the issue was
allowed to Institutional investors and at least 15% to noninstitutional
investors
who had
applied
for more
than
1,000
share
TYPES OF BOOK-BUILDING:
The Companies are bound to adhere to the SEBIs guidelines for book building offers
in the following manner:
75% book building
100% book building
75 per cent Book-Building Process:

Under this process 25 per cent of the issue is to be sold at a fixed price and the
balance of 75 per cent through the Book Building process.
2. Offer to Public through Book Building Process:

The process specifies that an issuer company may make an issue of securities to
the public through prospectus in the following manner:
A. 100 per cent of the net offer to the public through book building process, or
B. 75 per cent of the net offer to the public through book building process and 25
per cent of the net offer to the public at a price determined through book building
process.
100% BOOK BUILDING
75% OF THE NET OFFER THROUGH BOOK BUILDING PROCESS
ROLE OF INTERMEDIARIES
Who are the intermediaries in an issue?

Merchant Bankers to the issue or Book Running Lead Managers (BRLM), syndicate
members, Registrars to the issue, Bankers to the issue, Auditors of the company,
Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The
issuer discloses the addresses, telephone/fax numbers and email addresses of these
intermediaries. In addition to this, the issuer also discloses the details of the
compliance officer appointed by the company for the purpose of the issue.
Role of Merchant Bankers in Public Issues:
(i) Deciding on the size and timing of a public issue in the light of the market
conditions.
(ii) Preparing the base of successful issue marketing from the initial documentation
to the preparation of the actual launch.
(iii) Optimum underwriting support.
(iv) Appointment of bankers and brokers as well as issue houses.
(v) Professional liaison with share market functionaries like brokers, portfolio
managers and financial press for pre-selling and media coverage.
(vi) Preparation of draft prospectus and other documents.
(vii) Wide coverage throughout the country for collection of applications.
(viii) Preparation of advertising and promotional material
Who is eligible to be a BRLM?
A Merchant banker possessing a valid SEBI registration in accordance with the SEBI
(Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead
Manager to an issue.
What is the role of a Lead Manager? (Pre and post issue)
In the pre-issue process, the Lead Manager (LM) takes up the due diligence of
companys operations/ management/ business plans/ legal etc. Other activities of
the LM include drafting and design of Offer documents, Prospectus, statutory
advertisements and memorandum containing salient features of the Prospectus.
The BRLMs shall ensure compliance with stipulated requirements and completion of
prescribed formalities with the Stock Exchanges, RoC and SEBI including finalization
of Prospectus and RoC filing. Appointment of other intermediaries viz., Registrar(s),
Printers, Advertising Agency and Bankers to the Offer is also included in the preissue processes.
The LM also draws up the various marketing strategies for the issue. The post issue
activities including management of escrow accounts, coordinate non-institutional
allocation, intimation of allocation and dispatch of refunds to bidders etc are
performed by the LM. The post Offer activities for the Offer will involve essential
follow-up steps, which include the finalization of trading and dealing of instruments
and dispatch of certificates and demat of delivery of shares, with the various
agencies connected with the work such as the Registrar(s) to the Offer and Bankers
to the Offer and the bank handling refund business. The merchant banker shall be
responsible for ensuring that these agencies fulfill their functions and enable it to
discharge this responsibility through suitable agreements with the Company.
What is the role of a registrar?
The Registrar finalizes the list of eligible allottees after deleting the invalid
applications and ensures that the corporate action for crediting of shares to the
demat accounts of the applicants is done and the dispatch of refund orders to those
applicable are sent. The Lead manager coordinates with the Registrar to ensure
follow up so that that the flow of applications from collecting bank branches,
processing of the applications and other matters till the basis of allotment is
finalized, dispatch security certificates and refund orders completed and securities
listed.
Difference between Fixed Price Issue & Book Build Issue:
Fixed Price Issue
Price at which the securities are
offered/allotted is known in advance to
the investor
Demand for the securities offered is
known only after the closure of the issue
Payment is made at the time of
subscription wherein refund is given
after allocation
Book Build Issue

Price at which securities will be
offered/allotted is not known in advance
to the investor. Only an indicative price
range is known.
Demand for the securities offered can be
known everyday as the book is built
Payment only after allocation

Primary Issue: What Is Book Building?

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PRIMARY ISSUE

methods to issue primary market

Free Pricing Regime:

BOOK BUILDING PROCESS IN INDIA

Book Building is fundamentally a procedure utilized in IPOs for effective price

On the recommendations of Malegam committee, The concept of Book

norms for public

Compulsory display of demand at the terminals was made optional.

75% book building

100% book building

75 per cent Book-Building Process:

2. Offer to Public through Book Building Process:

75% OF THE NET OFFER THROUGH BOOK BUILDING PROCESS

Who are the intermediaries in an issue?

Book Build Issue

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