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 important for interpreting IPO pricing, assessing demand, and making informed investment decisions. In this article, 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.

Book building is a dynamic price discovery mechanism used during an IPO to determine the most appropriate price of securities based on investor demand. It helps companies and investors arrive at a fair issue price while ensuring transparency and efficiency throughout the process.

Partnering with Underwriter

The company collaborates with Book Running Lead Managers (BRLMs) or underwriters who manage the entire book building IPO process. These professionals assist in drafting documents, setting the price band, and ensuring that the issue complies with SEBI regulations.

Bidding Phase

During the bidding period, institutional and retail investors submit bids within the specified price range. This stage reflects market sentiment and interest levels, helping the issuer gauge demand for the securities.

Price Discovery 

Once the bidding window closes, all bids are evaluated to identify the price level that attracts maximum demand while meeting the issuer’s capital requirement. This method of book building ensures efficient price discovery, aligning valuations with real investor appetite.

Share Allocation & Listing

After finalising the price, shares are allocated to investors based on their bid amounts and category. Successful bidders receive allotments, and the securities are later listed on recognised exchanges, completing the book building method process.

Many companies in India prefer the book building process for their IPOs because it offers transparency, flexibility, and demand-driven valuation. This book building method allows issuers to assess investor interest before finalising the price, ensuring that the issue aligns with both market conditions and investor expectations.

By relying on investor bids to determine pricing, it helps companies determine pricing based on demand data. It also helps attract a broader investor base, promotes market confidence, and supports efficient allocation of shares.

There are mainly three types of book building: traditional book building, accelerated book building (ABB), and reverse book building (RBB). Each serves a distinct purpose in capital markets, depending on the nature of the issue and timing requirements.

Traditional Book Building

This is the most common form of book building used for initial public offerings (IPOs). In this approach, investors bid within a predetermined price range to help determine the final issue price. It ensures transparent price discovery and allows broader participation from institutional and retail investors alike.

Accelerated Book Building (ABB)

Accelerated book building is typically used by listed companies seeking to raise capital quickly, often from institutional investors. The process involves a shorter bidding window, sometimes lasting just one or two days, allowing the issuer to access funds efficiently without a prolonged offer period.

Reverse Book Building (RBB)

Reverse book building works in the opposite direction and is generally applied during buyback or delisting offers. Here, shareholders quote the prices at which they are willing to sell their shares, and the final price is determined based on these bids. This ensures fair valuation and transparency when companies wish to delist or repurchase their stock.

The book building process follows a sequence of structured steps designed to ensure fair price discovery, regulatory compliance, and efficient allocation of shares in an IPO. Each stage plays a vital role in determining investor demand and the final issue price.

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.

The book building method offers several advantages for both issuers and investors by ensuring transparent pricing, efficient capital mobilisation, and broader participation in IPOs.

Efficient Price Discovery

The process reflects genuine market demand, enabling issuers to determine a fair issue price based on investor bids. This demand-driven approach minimises pricing discrepancies and supports accurate valuation.

Higher Transparency

Throughout the bidding period, daily updates disclose the demand across investor categories, allowing participants to gauge market sentiment and investor confidence in real time.

Flexibility in Bidding

Investors can select their preferred price within the defined band and are allowed to revise, modify, or withdraw their bids before the closure of the bidding window, enhancing control and convenience.

Promotes Wider Participation

The method encourages active participation from Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), and retail investors, creating a balanced and competitive marketplace that strengthens the overall IPO process.

While the book building process promotes transparency and fair valuation, it also presents certain challenges that issuers and investors should consider before participation.

Complexity

The process involves multiple intermediaries, such as underwriters, lead managers, and registrars, making it relatively complex to coordinate. For first-time investors or smaller issuers, understanding each procedural step may be challenging.

Cost and Time Intensive

The book building process requires extensive marketing, due diligence, and compliance efforts, which increase both time and cost for the issuer. These expenses are typically higher than those incurred in a fixed-price issue.

Pricing Risks

Since the final price depends on investor sentiment and market conditions, there is a risk of underpricing or overpricing the issue. Unfavourable market movements during the bidding period can also affect the overall subscription outcome.

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 help in informed decision-making during IPO seasons.

While the process is complex, it offers transparency, pricing efficiency, and wider participation in capital markets.

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.