Book Built Issue IPO – Process | Steps | Types | Pros & Cons

Book Built Issue IPO

The book built Issue is the process in which the security issuer discovers the issue price for the shares.
It is considered as one of the effective mechanisms to assess the demand of the security which helps in deriving the right issue price of the shares.
Moreover, it helps investors to value the price of the share which they think should be right for the security.
This methodology is recommended across all major stock exchanges and regulators.
Let’s understand the process of the Book Built Issue IPO in this blog.

The process of price discovery helps in generating and recording investor demand for shares before determining the issue price.
The book-building process has beaten the fixed price method. Wherein, the price of the security is fixed prior to IPO launch and investors’ interest is not considered in determining the right price of the shares.
That’s why book built process is considered a far better method for assessing the demand of the shares.

Also Read Cut Off Price in IPO and OFS – Floor Price vs Cut-off Price

What are the Steps in Book Building Process?

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When a company decides to go public by listing its shares on the stock exchanges for the very first time via IPO.
Then company management decides various things to get its share listed on the stock exchange such as issue size, share price, etc.
To get this done firstly company management has to appoint an underwriter to help in the listing process followed by the below steps to determine the issue price.

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Now let’s study each step involved in the book-built issue via IPO.

1. Hiring Underwriter

The first steps direct the issuing company to hire a group of investment banks that have expert knowledge of the IPO process and will act as a team of underwriters.
In consultation with the company underwriters to determine the size of the issue,
the price range they are looking forward to bidding from the investors.
The team of underwriters proceeds with a draft of the prospectus which will set the company expectation with investors in terms of their financials basically their fundamentals, issue size, price band, and prospects of the company.

Also Read Price Band in IPO?

2. Investor’s Bidding

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Followed by hiring, the Investment bank invites investors. Investment bankers use their networks to tap many investors for the bidding process. In addition to this investment banks create a demand for the shares by creating awareness via marketing campaigns. Within the price band, investors are encouraged to apply for the shares.

Also Read Types of Investors in IPO

3. Share Pricing

After all the bids are received from the investors, a team of underwriters evaluates the aggregate demand of the shares.
Later to designate the price for the share, the team of underwriters uses the weighted-average method to arrive at the final price of the share.
This final price is also known as ‘Cut-Off price/Issue price.’
In case, there is a good response for IPO by investors, the Ceiling price is usually a ‘Cut-off Price and IPO will be over-subscribed.

Also Read Face Value in IPO – How to Calculate Face Value or Nominal or Par value?

4. Biding Process Transparency

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As per the guidelines of SEBI, the company is required to make the details public of the bidding process. This is to ensure there is transparency in the complete process. It’s an underwriter’s duty to perform this activity and reveal the final bidding figures at the different price levels.

5. Allotment & Settlement

In the end, the allocation process begins by allocating shares at the cut-off.
In case of over-subscription, shares get allocated to the investors who placed a bid at the cut-off price or more than that.
If investors place a bid more than the cut-off price excess money gets refunded back to them.
However, if someone places a bid lesser than the cut-off price then no shares get allocated and the complete amount goes for refund.
Moreover, if the IPO goes under-subscribed means bids received less than the issue size then all investors who bided for the IPO will be allocated their respective shares.
In case IPO is subscribed less than 90% then shares get forfeited and money gets refunded to original buyers.

Also Read What is the Difference between Record Date and Ex-Dividend Date?

Types of Book Built Issue IPO

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Let’s discuss the kind of book build issue processes followed in India:

Accelerated Book Building: As the name suggests it happens in a little hurry. This method is adopted in case the company is in immediate need of finance and debt financing is out of the question.
For instance, one company is going to offer to acquire another company & they are in urgent need of capital to close the deal. So the company can contact the team of underwriters on the evening prior to the intended placement.
As discussed underwriters have a large network of institutional and wealthy investors, they pitch on behalf of the company to raise capital for the company to own shares.
Without going into the marketing route this process get closes within a day or two hence referred to as an accelerated book-building process.

Partial book building: With the name of type we can make out there is partial book building where a certain % get allocation via book building and rest partial goes for fixed pricing.
Therefore, investment banker only encourages bids from the selected group of investors & based on their bids, they take the weighted average of the prices to finalize the cut-off price.
Basis the cut-off price, retails investors are offered shares at a fixed price. To sum up, under the partial book-building process, the bidding happens but with a selected group of investors.

Also Read How to Apply for Rights Issue through Online? – Bank or Demat a/c or RTA Website

Advantages and Disadvantages of Book Built Issue IPO

Last but the not the least discuss the advantages that company gets if they opt for book-building process over fixed pricing method:

Advantages
The most efficient method of pricing the shares as the cut-off price is based on the aggregate demand from the investors.
The issuer company gets the maximum price for the securities.
Investors also get the fair price basis the actual demand in the market.
Greater transparency as underwriters are responsible for publicizing this bidding process information in local newspapers and stock exchange platforms.
Disadvantages
High cost involved in the book-building process as a company you must hire investment bankers to initiate this process. In return, they charge a hefty fee to make this process a success.
The time involved is high as compared to fixed pricing as post bidding only the cut-off price gets decided basis which allocation happens.

Conclusion

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In short, Book building is one of the effective ways by which companies,
with the help of the underwriters, price their share in IPO.
Additionally, it is recommended by all the major stock exchanges and regulators.
It does help investors to value the price of the shares by submitting the bids to the underwriter,
which is just not possible if the company chooses a fixed-price mechanism to price its share.

Also Read Rights Issue Advantages and Disadvantages

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