Book Building of Equity Shares

Submitted By:Richa Juneja (50801071)Saurabh Dhiman (50801081)Seema Sharma (50701516)Sarbroop Singh (50801079)

INVESTMENT IN SECURITIES

1.IPO (Initial Public Offer)

2.Through Direct market purchase. (BSE, NSE)

“IPO is when a privately owned company issues shares of stock to be sold to the general public.”

IPO before BookBuilding Buying of shares on fixed price.

IPO after BookBuilding Share prices between a specified price band

Price band in the book building process refers to the band within which the investors can bid. The spread between the floor and the cap of the price band is not be more than 20%

IPO and BookBuilding

Book building refers to the collection of bids from investors, based on a floor price, which is indicated before the opening of the bidding process. the issue price is fixed after the bid closing date.

Book building is a technique used for marketing a public offer of equity shares of a company.

What Is BookBuilding

Types Of Book Building

75% Book Building

Difference between shares through book building and normal public issue?

Features Fixed Price process Book Building process

PricingPrice at which the securities are offered/allotted is known in advance to the investor.

Price at which securities will be offered/allotted is not known in

advance to the investor. Only an indicative price range is known.

Demand

Demand for the securities offered is known only after the closure of the issue

Demand for the securities offered can be known

everyday as the book is built.

Payment

100 % advance payment is required to be made by the investors at the time

of application.

10 % advance payment is required to be made by the QIBs along with

the application, while other categories of investors have to pay

100 % advance along with the application.

100% Book Building

Types of investors

The retail individual investor (RII)----- 35% Non-institutional investor (NII)----- 15% Qualified Institutional Buyers (QIBs)-----50%

RII is an investor who applies for stocks for a value of not more than Rs 100,000.

NIIs are commonly referred to as high net-worth

individuals.

QIBs are institutional investors who posses the expertise and the financial muscle to invest in the securities market.

Division of shares in100% Book Building

BOOK BUILDING PROCESS

Book Building as a process Nominates lead merchant banker(s) as 'book

runners'. Issuer specifies number of securities to be

issued and the price band for bids. Issuer also appoints syndicate members with

whom orders are to be placed by the investors. Syndicate members input the orders into an

'electronic book'. This process is called 'bidding' and is similar to open auction.

The book normally remains open for a period of 3 to 5 days.

Contd… Bids can be revised by the bidders before the

book closes. On the close of the book building period, the

book runners evaluate the bids on the basis of the demand at various price levels.

The book runners and the Issuer decide the final price at which the securities shall be issued.

Generally, number of shares are fixed, issue size gets frozen based on the final price/share.

Allocation of securities is made to the successful bidders. The rest get refund orders.

BOOK RUNNERS

This process will help to discover the demand and the price of the shares. also, the costs of public issue are much reduced and the time taken for completion of the entire process is much less than the in the normal public issue.

Why Book Building?

The price discovery is a function of demand at various prices. The highest price at which the issuer is ableto issue the desired number of shares is the price at which the book cuts off i.e. Rs. 22 in the aboveexample. The issuer, in consultation with the BRLM, will finalize the issue price at or below such cut offprice i.e. at or below Rs. 22. All bids at or above this issue price and cut-off bids are valid bids and areconsidered for allocation in the respective categories.

Example

BSE’s book building system

BSE offers a book building platform through the Book Building software that runs on the BSE Private network.

This system is one of the largest electronic book building networks in the world, spanning over 350 Indian cities through over 7000 Trader Work Stations via leased lines, VSATs and Campus software is operated by book-runners of the issue and by the syndicate members , for electronically placing the bids on line real-time for the entire bidding period.

In order to provide transparency, the system provides visual graphs displaying price v/s quantity on the BSE website as well as all BSE terminals.

Limitations of Book- Building System

In the case of the potential investors, the companies can adjust the attributes of the offer according to the preferences of the potential investors.

The issuer company should be fundamentally strong and well known to the investors.

The book-building system works very efficiently in matured market conditions.

In such circumstances, the investors are aware of the various parameters affecting the market price of the securities.

There is a possibility of price rigging on listing as promoters may try to bail out syndicate members

A company going public has to offer its minimum 25 per cent of issued post-issue equity to the public and maximum of 75 per cent post issue equity can remain with the promoters

Companies making an issue of over Rs.200 crores need offer only a minimum of 10 per cent of post issue equity. Out of the total public issue size, 90 per cent of the issue can be offered through book building process while only 10 per cent of the issue can be offered via fixed price portion.

Out of the book building portion, a minimum of 10 per cent of the issue size has to be reserved for retail bidders while 75 per cent of the issue can be offered to wholesale bidders.

SEBI Guidelines