What is Book Building in IPO?

A company or business issuing its shares in the public capital market has to go through the Initial Public Offering (IPO) process. These companies use different methods to determine the price before allotting shares. This is done in the last stage of the process, when the issue is subscribed.

 

Booking building is a process in which companies determine the IPO prices. This is done with the help of underwriters or investment banks.

Before investing in any IPO, be aware of how the prices of an issue are determined. Under the book building mechanism, price discovery is done in five steps.

1. Hiring an Underwriter

The company employs the services of an underwriter or an investment bank. An underwriter helps the company determine the issue size and decide on the price range. It also prepares a Draft Red Herring Prospectus.

2. Bidding by Investors

Various individual and institutional investors are invited to bid for the IPO. It is crucial that investors own an active Demat account. Companies generally open the bidding window for their IPOs for three days.

3. Book Building

The company and underwriter analyse the data to assess the total demand. This is done while the IPO receives bids from investors. the underwriter decides on a final issue price, referred to as the cut-off price. They use the weighted aggregate mechanism for this part. 

4. Publishing the Rates

To ensure transparency, stock exchanges require companies to publish information on investor bids. 

5. IPO Allotment

Based on the level of IPO subscription and cut-off price, the company will allot shares to you and settle the remaining balance, if any. 

 

You can invest in an IPO to strengthen your portfolio. But you must have a Demat account to participate. Open one on Bajaj Markets at zero annual charges and low brokerage fees. 

There are two main types of book building processes in an IPO. Here are some details to keep in mind:

1. Partial Book Building

Under partial book building, the investment banker invites bids only from select investors. The cut-off price will be the fixed price for retail investors in the later stage.  

2. Accelerated Book Building

Companies that need funding adopt an accelerated book building approach. In this case, the company contacts investment banks. They finally go ahead with the bank that offers the highest backstop price. The underwriter then requests for bids from other institutional investors. This is to offload its ownership in the company.

 

SEBI has set some guidelines for the book building process. Under this, the issue company must follow either of the below methods:  

• 75% Book Building Process 

Here, the price of only 75% of the issue is discovered via book building. The rest may be decided by the company.

• 100% Book Building Process 

In this case, the price for the full issue is set as per the book building process.

The book building method allows large companies to enjoy the following benefits: 

• Greater efficiency as compared to fixed-priced IPOs because the offer price is determined based on demand

• Companies disclose all the bidding information, making it a transparent process  

• Inexpensive price discovery method that reduces paperwork and advertising and brokerage costs 

• Ensures the IPO price remains close to the actual price and is not overpriced or underpriced