What is Book Building? What is the Book Building Procedure?

Book Building is a process used for marketing a public offer of equity shares of a company and refers to the collection of bids from investors. Book building refers to the process of generating, capturing, and recording investor demand for shares during an IPO (or other securities during their issuance process) in order to support efficient price discovery. Usually, the issuer appoints a major investment bank to act as a major securities underwriter or book runner. The “book” is the off-market collation of investor demand by the book runner and is confidential to the book runner, issuer, and underwriter.

Where shares are acquired, or transferred via a book build, the transfer occur off-market, and the transfer is not guaranteed by an exchange’s clearing house. Where an underwriter has been appointed, the underwriter bears the risk of non-payment by an acquirer or non-delivery by the seller.

The Book Building Procedure.

The main parties who are directly associated with book building process are the issuer company, the Book Runner Lead Manager (BRLM) and the syndicate members. The Book Runner Lead Manager (i.e. merchant banker) and the syndicate members who are the intermediaries are both eligible to act as underwriters. The steps which are usually followed in the book building process can be summarized below:

The issuer company proposing an IPO appoints a lead merchant banker as a Book Runner Lead Manager (BRLM).

Initially, the issuer company consults with the BRLM in drawing up a draft prospectus (i.e. offer document) which does not mention the price of the issues, but includes other details about the size of the issue, past history of the company and a price band. The securities available to the public are separately identified as “net offer to the public”.

The draft prospectus is filed with SEBI which gives it a legal standing.

A definite period is fixed as the bid period and Book Runner Lead Manager (BRLM) conducts awareness campaigns like advertisement, road shows, etc.

The BRLM appoints a syndicate member, a SEBI registered intermediary to underwrite the issues to the extent of net offer to the public.

The BRLM is entitled to remuneration for conducting the Book Building process.

The copy of the draft prospectus may be circulated by the Book Runner Lead Manager (BRLM) to the institutional investors as well as to the syndicate members.

The syndicate, members create demand and ask each investor for the number of shares and the offer price.

The Book Runner Lead Manager (BRLM) receives the feedback about the investor’s bids through syndicate members.

The prospective investors may revise their bids at any time during the bid period.

The Book Runner Lead Manager (BRLM) on receipts of the feedback from the syndicate members about the bid price and the quantity of shares applied has to build up an order book showing the demand for the shares of the company at various prices. The syndicate members must also maintain a record book for orders received from institutional investors for subscribing to the issue out of the placement portion.

On receipts of the above information, the Book Runner Lead Manager (BRLM) and the issuer company determine the issue price. This is known as the market-clearing price.

The BRLM then closes the book in consultation with the issuer company and determine the issue size of (a) placement portion and (b) public offer portion.

Once the final price is determined, the allocation of securities should be made by the Book Runner Lead Manager (BRLM) based on prior commitment, investor’s quality, price aggression, earliness of bids etc. The bid of an institutional bidder even if he has paid fall amount may be rejected without being assigned any reason as the Book Building portion of institutional investors is left entirely at the discretion of the issuer company and the Book Runner Lead Manager (BRLM).

The Final prospectus is filed with the registrar of companies within 2 days of determination of issue price and receipts of acknowledgement card from SEBI.

Two different accounts for collection of application money, one for the private placement portion and the other for the public subscription should be opened by the issuer company.

The placement portion is closed a day before the opening of the public issue through fixed price method. The Book Runner Lead Manager (BRLM) is required to have the application forms along with the application money from the institutional buyers and the underwriters to the private placement portion.

The allotment for the private placement portion shall be made on the 2nd day from the closure of the issue and the private Placement portion is ready to be listed.

The allotment and listing of issues under the public portion (i.e: fixed price portion) must be as per the existing statutory requirements.

Finally, the SEBI has the right to inspect such records and books which are maintained by the Book Runner Lead Manager (BRLM) and other intermediaries involved in the Book Building process.

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