Concepts and Process of Book Building

Concept:

Book Building is a process by which corporates determine the demand and the price of a
proposed issue of securities through public bidding. The objective is to determine the quantum of
the issue on the basis of the price book built. Once the price and the quantum of issue has been
determined by the issuer, the issue may either be offered under the private placement of the
public offer category, or both, as per the requirement of the SEBI regulations.

Characteristics:

Tendering Process

Book building involves inviting subscriptions to a public offer of securities, essentially through a
tendering process. Eligible investors are required to place their bids for the number of shares to
be issued and the price at which they are willing to invest, with the lead manager running the
book. At the end of the cut off period, the lead manager determines the response to the issue in
terms of the quantum of shares and the highest price at which demand is sufficient to match the
size of the issue.

Floor Price:

Floor price is the minimum price set by the lead manager in consultation with the issuer. This is
the price at which the issue is open for subscription. Investors are free to place a bid at any price
higher than the floor price.

Price Band:

The range of price (the highest and the lowest price) at which offer for the subscription of
securities is made is known as ‘price band’. Investors are free to bid any price within in the price
band.

Bid:

The investor can place a bid with the authorized lead manager merchant banker. In the case of
equity shares, usually several brokers in the stock exchange are also authorized by the lead
manager. The investor fills up a bid-cum-application form, which gives a choice to bid for up to
three optional prices. The price and demand options submitted by the bidder are treated as
optional demands and are not cumulated.

Allotment:

The lead manager, in consultation with the issuer, decides the price at which the issue will be
subscribed and proceeds to allot shares to investors who have bid at or above the fixed price. All
investors are allotted shares at the same fixed price. For any allottee, therefore the price would be
equal to or less than the price bid.

Participants:

Generally, all investors, including individuals, eligible to invest in a particular issue of securities
can participate in the book building process. However, if the issue is restricted to qualified
institutional, as in the case of government securities, then, only those eligible can participate.

The Process:

The procedures relating to the book building process depend on the level at which it is to be
taken up by a corporates entity. According to the SEBI, there are two options available to a
company either 75 percent or 100 percent book building process. Each of these methods is
discussed briefly below:

75 percent Book Building:

The 75 percent book building option of securities is offered on a firm basis where a minimum of
25 percent of the securities is offered to the public.

The following steps are involved in this process:

1) Eligibility: All corporates eligible for public shares are also eligible for raising capital through
the book building process.
2) Earmarking securities: Where a decision is taken by a corporates to issue shares through the
book building process, the securities to be used should be separately earmarked as the placement
portion category in the prospectus. The balance securities must be stated as net offer to the public
category.
3) Draft prospectus: A draft prospectus containing all the information except price of the issue
must be filed wit the SEBI. Although no precise mention is made, a price band indicating the
price range within which securities are being offered for subscription should be indicated. The
prospectus is to be filed with the ROC within two days of the issue price being finalized.

4) Appointment of book runner: The issuing company appoints a merchant banker as the book
runner, which mentioned in the prospectus. The book runner circulates a copy of the draft
prospectus among the institutional buyers who are eligible for firm allotment and to the
intermediaries who are eligible to act as underwriters, inviting them to subscribe to the issue of
securities. The book runner maintains a record of the names and number of securities ordered by
intermediary buyers and the price at which they are willing to subscribe the issue under the
placement portion. The book runner collects information about the subscriptions received from
underwriters and other intermediaries. After a stipulated time period, the book runner aggregates
the subscription so received. The underwriters are required to make a payment of the total
amount for the subscription of issues.

Price Setting:
Based on the data collected from intermediaries relating to the total orders received, the
issuing company and the book runner set an appropriate price of the issue for the offer to the
public. The issue price is determined on the basis of bids received through members of the
syndicate formed under the lead book runner. This would be the issue price for both the private
placement and the public category.

The Number of securities = Amount of issue / price per security

STEPS IN THE PROCESS OF BOOK BUILDING PROCESS

13. The Final prospectus is filed with registrar of companies of within 2

days of determination of issue price and receipts of acknowledgement
card from SEBI.

14. 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.

15. The placement portion is closed a day before the opening of the
public issue through fixed price method. The Book Runner is required to
have the application forms along with the application money from the
institutional buyers and the underwriters to the private placement
portion.
16. 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.

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

18. Finally, the SEBI has the right to inspect such records and books
which are maintained by the Book Runner and other intermediaries
involved in the Book Building Process

Refund

The broker shall refund the amounts received from unsuccessful applicants within 3 days
of the receipt of the allocation. The Details of the amount received from the successful applicants
shall be furnished to the stock exchange in electronic medium

Certificate

Once all the formalities for subscription and allotment are completed the registrars to the
issue post the share certificate to the applicants or arrange to have the shares demated by a
depository