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Initial Public Offerings (IPOs) are crucial milestones for companies entering the capital markets. One of the most prevalent methods of pricing an IPO is through the book-building process. This mechanism allows market forces to determine the most efficient price of a share based on investor demand. The process, regulated by SEBI in India, ensures transparency and equitable pricing, benefitting both issuers and investors
Book building is a price discovery mechanism used during an IPO where bids are collected from investors within a specified price band. The final issue price is determined based on the demand shown by investors, especially Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), and Retail Individual Investors (RIIs). It contrasts with the fixed-price method, where the share price is predetermined.
The steps for the book-building process are mentioned below:
The issuing company appoints a merchant banker or book-running lead manager (BRLM) who manages the entire IPO process.
The DRHP, filed with SEBI, includes all vital information about the company but excludes the final price. It outlines the price band and total number of shares offered.
The issuer, in consultation with the BRLM, sets a price range (floor and cap price) within which bids can be placed.
During the bidding period, typically 3-5 working days, investors place bids indicating the number of shares and the price they are willing to pay within the band.
The book is closed at the end of the bidding period. The final issue price is determined based on demand and bids received.
Shares are allotted to investors, and the company lists on stock exchanges. Oversubscription can lead to proportional allotment or lottery for RIIs.
There are different types of book building. Here’s a list:
All shares offered are through the book-building process. It is mandatory for issues of Rs. 25 crore or more.
75% of the issue is offered via book-building while the rest follows fixed pricing.
A fast-track method used by listed companies to raise additional capital. The bidding window is usually just one day.
Only a portion of the issue is offered through book building, with the remaining via fixed price.
Used in buybacks, shareholders bid to sell back their shares to the company, indicating their expected price.
The benefits of the book-building process are given below:
Demand-Based Pricing: It adjusts based on actual investor interest, helping to arrive at a fair value.
Improved Allocation Efficiency: Investors bid at different prices, improving capital deployment efficiency for the issuer.
Greater Price Transparency: Investors can see demand patterns during the bidding period.
Broader Market Participation: Encourages wider participation by QIBs, NIIs, and RIIs.
Enables Better Valuation Insights: Bidding data provides valuable inputs for valuation in subsequent capital raising.
Companies often prefer the book building process when pricing an Initial Public Offering (IPO) because it is market-driven, enhances investor confidence, minimizes underpricing, and ensures efficient share allocation. This method allows companies to understand investor expectations, which can be crucial for future strategies and decisions.
Key reasons companies choose the book-building process:
Efficient Price Discovery: Determining the price of shares based on investor demand leads to a fair valuation .
Enhanced Investor Confidence: Transparency and fairness in the book building process can boost investor confidence, making them more likely to participate .
Reduced Underpricing: Book building minimizes the risks of underpricing or overpricing by aligning the issue price more closely with market demand, leading to more stable post-IPO performance .
Efficient Share Allocation: Companies can allocate shares more efficiently among different types of investors .
Optimal Capital Raising: Companies can maximize funds by setting a fulfilling rate .
Flexibility: Book building provides flexibility to adjust the offering price within a predetermined range based on investor demand, accommodating market conditions and maximizing investor participation .
Transparency: Investors can clearly see demand developments, which decreases pricing risks .
Better Control Over Demand: Analysing bids from investors allows companies to decide how many shares to issue and at what price, helping them avoid the risk of not selling enough shares or setting the wrong price
Price discovery in the book-building process is based on demand. Let’s understand with a simple example:
The price band is set at Rs. 100–120.
Investor A bids for 500 shares at Rs. 105.
Investor B bids for 1,000 shares at Rs. 110.
Investor C bids for 2,000 shares at Rs. 120.
The final price may be fixed at Rs. 110 or Rs. 120 depending on cumulative demand. SEBI allows companies to choose the price point that enables optimal subscription while ensuring fair allocation.
For instance, in the 2021 IPO of Zomato, the book-building process was followed with a price band of Rs. 72–76. The final issue price was set at Rs. 76, reflecting the bids received during the process. The IPO was oversubscribed multiple times, demonstrating how demand influences pricing and investor participation in the book-building format.
SEBI has laid down comprehensive rules under the SEBI (Issue of Capital and Disclosure Requirements) Regulations:
Minimum 35% reservation for retail investors.
QIBs cannot withdraw bids once placed.
The Issuer must offer electronic bidding through stock exchanges.
Pricing, allotment, and listing must follow transparent procedures.
Post-issue monitoring reports must be filed for regulatory audit and tracking.
Here’s a comparison of features for book-building and fixed price issue:
Feature |
Book Building |
Fixed Price Issue |
|---|---|---|
Price Determination |
Based on investor bids |
Pre-decided by issuer |
Investor Participation |
More dynamic and flexible |
Limited price flexibility |
Disclosure |
Price band in DRHP, final later |
Fixed price disclosed upfront |
Allotment |
Based on demand |
On first-come-first-served basis |
Transparency |
Based on bidding data and SEBI disclosures |
Based on disclosed fixed price |
The book-building process has revolutionised the IPO landscape by making it more dynamic and investor-friendly. Its structured and transparent framework has instilled confidence among all participants, aiding in efficient price discovery and fair distribution of shares. With SEBI’s vigilant oversight, this method continues to evolve, enhancing trust in India’s capital markets.
This content is for informational 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.
Sources
SEBI (www.sebi.gov.in)
National Stock Exchange (www.nseindia.com)
Bombay Stock Exchange (www.bseindia.com)
Company Draft Red Herring Prospectuses
Zomato IPO case study: SEBI filings & financial news portals
In a fixed-price IPO, the issue price is pre-set. Book building lets investors bid at prices within a band, and the final issue price is based on demand.
QIBs (Qualified Institutional Buyers) play a major role as their large bids influence price discovery. They are not allowed to withdraw bids once placed.
Yes. SEBI requires a minimum of 35% of the issue to be reserved for retail investors to ensure broader participation.
It’s a process used during share buybacks where investors indicate the price at which they are willing to sell shares back to the company.
SEBI mandates electronic platforms for bidding, timely disclosures, and strict rules on pricing and allocation to ensure transparency.
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Posted on 05 Jun
Geetanjali Lachke
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