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Book Building
Book Building
A method of raising money used by corporations in which investors let the corporations know the price at which they are interested to buy stock of the company.
A method in which price is not given in advance, rather a price band is given to the investors within which they bid.
The investor bid by stating the volume and price at which they wish to purchase the IPO shares.
IPOs final price is determined on the basis of all the bid prices.
The lowest price in the price band is known as floor price. The highest price in the price band is known as cap price. The price at which shares are allotted is known as cut off price. The upper price of the band can be a maximum of 1.2 times the floor price.
TRADITIONAL OFFERING
Price at which securities are offered are known in advance
BOOK BUILDING
Price at which securities will be offered is not known in advance. Only an indicative price range is given
DEMAND
Demand for securities is known only after the closure of the issue Issuer has no discretion over the quality of investors as the shares are issued to the general public. Includes certain fixed costs that push the overall cost of the transaction higher.
Demand is known everyday as the Book is built. Issuer can decide to allocate shares to any investors falling within the cut-off price range. The cost of the transaction is reduced as the public portion is smaller.
INVESTORS
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A Book-runner is nominated by IPO issuing company. Company announces the total number of shares to be issued and the price band in which the investors can bid. Investors are then allowed to bid for these issued shares for a specific period of time only. Investors place their bids (i.e. Price and quantity of shares) through brokers. Brokers stores in electronic book Stored bids are evaluated by book-Runner The book-runners and company decides the final price at which the shares shall be issued. IPOs are allotted to eligible investors.
Institutional Investors.
Retails Investors
The SECP formally launched the book building rules in April 2008. First company to issue its shares through book building was GHANI GASES LTD in JUNE 2011. TPL DIRECT INSURANCE LTD also issued its shares through book building. Both the companies used AKD SECUTRITIES LTD as their book runner.
Conclusion
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Book building method is considered more transparent and market determined than fixed price IPOs. Here the price is not pre-determined and is discovered through biding.