What is Book Building in IPO?

The book building process in an Initial Public Offering (IPO) plays a pivotal role in modern capital markets. It helps companies raise funds while giving investors a market-driven price discovery mechanism. Instead of assigning a fixed price to the shares, the company, with the help of investment bankers, allows investors to bid within a price band. This dynamic pricing approach ensures transparency, competitiveness, and fair valuation of IPO shares.

For investors, understanding how the book building method works is crucial to interpreting IPO pricing, assessing demand, and making informed investment decisions. In this guide, we explore the meaning, mechanism, types, benefits, and limitations of the book building process.

Book building is a price discovery method used in IPOs where investors place bids on shares within a predetermined price range, known as the price band. The company, along with Book Running Lead Managers (BRLMs), analyses the bids to determine the final issue price.

The process provides a window into investor demand and helps establish a market-efficient offer price.

1. 100% Book Building Process

• The entire issue is offered via book building.
  

• Investors bid within the disclosed price band.
  

• Common in large IPOs in India.
  

2. 75% Book Building Process

• At least 75% of the issue is offered via book building.
  

• The rest is issued at a fixed price.
  

• Rare and usually applied under specific regulatory provisions.
  

Step 1: Appointment of Book Running Lead Managers (BRLMs)

The issuer appoints SEBI-registered merchant bankers who act as intermediaries to manage the issue.

Step 2: Drafting and Filing of DRHP

The company prepares a Draft Red Herring Prospectus (DRHP) and submits it to SEBI. It contains details about the business, risks, financials, and IPO objectives.

Step 3: Determination of Price Band

A price band is set in consultation with BRLMs. It represents the range within which investors can place their bids.

Example: ₹95–₹100.

Step 4: Bidding Period

Investors bid for shares through platforms supported by ASBA (Applications Supported by Blocked Amount). Bidding usually remains open for 3-5 working days.

Retail investors can select the ‘cut-off price’ option, expressing willingness to buy at the final price decided by the issuer.

Step 5: Book Building and Price Discovery

Bids are collected and categorised by price points. The issuer analyses demand at various price levels to identify the cut-off price.

Formula for Oversubscription Ratio:

Oversubscription Ratio = Total Number of Shares Bid / Total Shares Offered

Price Discovery:
The price at which the maximum shares are successfully allocated becomes the final issue price.

Step 6: Allocation and Allotment

Shares are allocated based on investor category (Retail, QIB, NII) and subscription levels. In oversubscribed cases, allotment is done via lottery or proportionately.

Step 7: Listing on Stock Exchanges

Once allotted, the shares are credited to demat accounts and listed on stock exchanges like NSE and BSE.

The Securities and Exchange Board of India (SEBI) mandates specific rules to ensure a transparent process:

• Issuers must disclose the price band at least 2 working days before bidding.
  

• IPOs must use ASBA for application.
  

• Allocation guidelines:
  

  • QIBs: 50%
    

  • NIIs: 15%
    

  • RIIs: 35%
    

• Anchor investors can bid one day prior to the IPO opening.

Efficient Price Discovery

Reflects actual market demand, helping discover a fair issue price.

Higher Transparency

Daily updates show real-time demand across investor categories.

Flexibility in Bidding

Investors can choose prices and modify or cancel bids until the window closes.

Promotes Wider Participation

Encourages QIBs, NIIs, and retail investors to participate actively.

Complexity

Involves multiple intermediaries and steps, which can overwhelm new investors.

Cost and Time Intensive

Marketing, underwriting, and compliance lead to higher costs for the issuer.

Pricing Risks

Market demand can lead to underpricing or overpricing depending on sentiment.

Consider a hypothetical company ABC Ltd. launching an IPO with the following details:

• Issue size: 1 crore shares
  

• Price band: ₹100–₹120
  

During the bidding window:

• Investors place bids for 2.5 crore shares
  

• Most bids are concentrated at ₹115
  

Based on demand concentration, ₹115 is fixed as the final issue price.

• Oversubscription: 2.5x
  

• Allotment to retail: via lottery due to oversubscription
  

This shows how investor interest and price discovery work together to finalise the offer price.

Refer the following table:

Retail investors often rely on cut-off bidding to ensure allotment chances. Book building allows them:

• To observe subscription trends
  

• Make informed bidding choices
  

• Understand market sentiment
  

However, over-relying on buzz without reviewing the DRHP or financials can lead to suboptimal decisions.

Book building has emerged as a reliable and transparent method of price discovery in IPOs. It aligns pricing with investor demand, builds trust among market participants, and promotes fairness in capital raising. For investors, particularly those new to the markets, understanding how book building functions can enhance decision-making during IPO seasons.

While it adds complexity, the benefits in terms of transparency, pricing efficiency, and broader participation far outweigh the downsides.

This content is for educational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

SEBI - Book Building Process

NSE India - IPO Guidelines

BSE India - IPO Watch

Moneycontrol - IPO Insights

Groww - Book Building Explained

AngelOne - IPO Bidding Process