A new buzzword in the capital markets is book building. This esoteric, gobbledygook investment banker jargon is basically used for raising funds through the issue of securities. Being an alternative to conventional avenues it has created a lot of interest in the financial market. But what is it all about?
The process refers to the collection of bids from investors. The issue price is fixed after the bid closing date based on the price at which bids were made.
This procedure of raising funds from the equity capital market is novel to India. In light of this, the Securities and Exchange Board of India (SEBI) in its guidelines had stipulated a price band mechanism, which has now been replaced to a floor price mechanism. This stipulation is basically to provide an indicative price for the markets to help facilitate them in coping with a new system of capital raising and in price discovery. At a later date we could even see the removal of the floor price mechanism. Book building is seen as an alternative to a fixed price issue mechanism.
The parties to the issue include the Company (Issuer), Book running lead manager (BRLM), other syndicate members, underwriters, institutional and individuals investors.
Type of Book Building
The issue of securities through book building can be either through:
- 75% book building
- 100% book building
However, most companies opt for 75% book building, as SEBI guidelines for the latter option are still unclear.
75% Book Building
Under this type of public offer, the issue of securities has to be categorised into:
- Placement portion category
- Net offer to the public
Book building is an alternative to fixed price mechanism to the extent that is not reserved for the fixed price issue.
A draft prospectus is to be filed with SEBI. The prospectus shall mention an indicative price at which the securities will be offered. Any modifications made by SEBI will have to be incorporated and the responsibility for the same is that of the book runner. After the final Draft Offer Document (DOD) is ready the issuer is to place advertisements for the issue in at least:
- One national English daily
- One national Hindi daily
- One regional language daily in the town/city of the registered office
The advertisement should also mention the bid opening and closing date. The issue price for the placement portion and offer to the public has to be the same. The net offer to the public is to be made post book building within a maximum period of 15 days.
In the case of under subscription in the ‘net offer to the public’, spill over from the ‘placement portion’ will be permitted. This will be entitled to only those who have opted for this facility in the bid offer form. Preference will be given to individuals. The vice-versa case is also permissible.
The issue price is to be determined on the basis of market demand by the issuer in consultation with the book runner.
Company XYZ wants to issue 100 shares through book building. They demand is as follows.
(No. of shares)
The issue price will be that level at which all the shares get subscribed. In the above example, all the shares are being subscribed to between Rs 60 – Rs 70. Lets say at Rs 65 we are able to place all our shares, this then is the issue price (Rs 65).
The bid will be open for a minimum of five working days. The number of bidding centres will not be less than the collection centres as required by the SEBI guidelines. The applicants that have bid less than the issue price will be refunded their application money within the specified period. Successful bidders (bids equal to or greater than issue price) will be allotted their shares within the specified period. Bidders who have bid above the issue price will be refunded the surplus application money.
At least 15% of the book-building portion is to be reserved for non-institutional investors. These include Corporates, Overseas Corporate Bodies (OCB’s), Non–Resident Indians (NRI’s), High Networth Individuals (HNI’s), Hindu Undivided Family (HUF’s), Societies and Trusts.
In case of over subscription allotment to non-institutional investors will be made on pro-rata basis. However, for institutional investors the allotment will be on discretionary basis. Allotment is to be made within a period of 15 days from closure of the issue failing which the issuer will be liable to pay interest at the rate of 15% p.a. till the date of allotment.
List of companies that have issued securities through book building
|Current Price (Rs m)
On listing many of the issues shot through the roof. If book building facilitates price discovery why was there such a huge movement (correction)? Either the merchant banker made a wrong estimate of the market demand resulting in incorrect pricing. Or the issue was intentionally under priced. In both the cases the merchant banker stands to gain while the issuer losses. With the market evolving one can expect the issuers to be more savvy and pull up the banker should there be such incorrect pricing. However, till the capital market achieves a comfort level with the process there may continue to be pricing anomalies.