Book Building and Its Procedure under the Companies Act' 2013 | Company Law Notes for B.Com, BBA and MBA | CBCS Pattern

Book Building and Its Procedure

Companies Act' 2013

Company Law Notes for B.Com, BBA and MBA

Book building

Book building is a process of fixing price for an issue of securities on a feedback from potential investors based upon their perception about a company. It involves selling an issue step-wise to investors at an acceptable price with the help of a few intermediaries/merchant bankers who are called book-runners. Under book-building process, the issue price is not determined in advance, it is determined by the offer of potential investors. The book runner maintains a record of various offers and the price at which the institutional buyers, mutual funds, underwriters etc. are willing to subscribe to securities. On receipt of the information, the book runner and the issuer company determine the price at which the issue will be made. Thus, book-building helps in determining the price of an issue on more realistic way based on the intrinsic worth of the security. The main objective of book building is to arrive at fair pricing of the issue which is supposed to emerge out of offers given by various large investors like mutual funds and institutional investors.

As per SEBI guidelines, in an issue of securities through a prospectus option of 100% Book Building is also available to an issuer company if Issue of capital is Rs.25 crores and above. In India, there are two options for book building process. One, 25% of the issue has to be sold at fixed price and 75% is through book building. The other option is to split 25% of offer to the public (small investors) into a fixed price portion of 10% and a reservation in the book built amounting to 15% of the issue size. The rest of the book-built portion is open to any investor.

Procedure for the Book Building Process

The modern and more popular method of share pricing these days is the Book Building route. Procedure of book building is stated below:

a) Appointment of merchant banker as a book runner whose main purpose was to maintain the records of various offer prices at which potential investors are willing to subscribe to securities.

b) After appointing a merchant banker as a book runner, the company planning the IPO (i.e., initial public offer), specifies the number of shares it wishes to sell and also mentions a price band.

c) Potential Investors place their orders in Book Building process at a price higher than the floor price indicated by the company in the price band to the book runner.

d) Once the book building period ends, the book runner evaluates the bids on the basis of the prices received, investor quality and timing of bids.

e) Then the book runner and the company conclude the final price at which the issuing company is willing to issue the stock and allocate securities. Traditionally, the number of shares are fixed and the issue size gets determined on the basis of price per share discussed through the book building process.