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IPO price discovery mechanism

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Opening Question

Which of the following words does not belong to

the stock exchange?
(a) NAV
(b) NSE
(c) IPO
(d) KPO

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Opening Question

Which of the following words does not belong to

the stock exchange?
(a) NAV
(b) NSE
(c) IPO
(d) KPO

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Memory based Quiz

Which of the following is not a credit rating agency?

 (A) CRISIL
 (B) ICRA
 (C) NIKKEI
 (D) CARE

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Answer

Which of the following is not a credit rating agency?

 (A) CRISIL
 (B) ICRA
 (C) NIKKEI
 (D) CARE
Explanation: NIKKEI is stock exchange of Japan.

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There are two main methods for pricing an
issue:

 FIXED PRICE METHOD

 BOOK BUILDING
Fixed Price Vs Book Building ?

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Difference: Fixed Price Vs Book Building

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 QUIZ QUESTION 1
 Which of the following are key players in IPO process-
A. The Investors , The Issuer
B. The Investors , The Issuer ,Book Running Lead Managers
C. The Investors , The Issuer ,Book Running Lead Managers , Escrow Bankers
D. The Investors , The Issuer ,Book Running Lead Managers , Escrow Bankers, Registrars
E. None of these

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 QUIZ QUESTION 1
 Which of the following are key players in IPO process-
A. The Investors , The Issuer
B. The Investors , The Issuer ,Book Running Lead Managers
C. The Investors , The Issuer ,Book Running Lead Managers , Escrow Bankers
D. The Investors , The Issuer ,Book Running Lead Managers , Escrow Bankers, Registrars
E. None of these

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 FIXED PRICE METHOD

 This is the normal way of raising funds through public issue

 The shares of the company are evaluated much before the IPO
and the shares are offerred at the pre-fixed price

 Time taken is longer than the book building process

 WHAT IS BOOK BUILDING?

 It is a process wherein the investors determine the price of the shares.

 Option is given to investors to subscribe at the floor price or above at

their discretion.
 It is a process used for marketing a public offer of equity shares of a
company.
 FEATURES OF BOOK BUILDING

 The issuer comes out with an issue without finalizing the

issue price
 The floor price and the cap price are announced just
before the opening of the issue.
 Basis of Allotment

The allotment shall be made on proportionate basis to the investors.

The number of shares allotted shall not be less than minimum lot prescribed
and thereafter in multiples of one share.
Where the shares available for allotment to any category is less than the
minimum lot prescribed, on the basis of drawal lots the successful investors in
that category shall be identified.
 FEATURES OF BOOK BUILDING

 The allotment is normally on proportionate basis to the

retail investors

 About 15% to retail investors

 15% to non-institutional bidders and.,

 50% to qualified institutional bidders

Types of Book Building

 Under the SEBI DIP Guidelines, book building can be of the following types:
 (a) 100% of the net offer to the public is by the book building route;
 (b) 75% of the net offer to the public is by the book building route and the
balance 25% is at a fixed price which is determined by the price fixed under
the book built method;
 (c) 75% book building process

 [ SEBI (Disclosure and Investor Protection) Guidelines]

Current News :  LIC IPO: A big test for
India
 https://www.cnbctv18.com/finance/bottomline-lic-ipo-a-big-test-for-india-
12564262.htm

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 LIC IPO: Company files DRHP with SEBI; govt to sell
5% stake
Source URL : Lic Ipo: Company Files Drhp With Sebi; Govt To Sell 5% Stake (cnbctv18.com)

Video link : https://youtu.be/WwMpnTvvtO8 18

Video link:

 Video link : https://youtu.be/WwMpnTvvtO8

 LIC IPO: Company files DRHP with SEBI; govt to sell 5% stake

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 How LIC policyholders can get discounted IPO shares: 29
FAQs answered by LIC

Read more at:

https://economictimes.indiatimes.com/wealth/invest/how-lic-policyholders-can-get-discounted-ipo-shares-29-faqs-answered-by-lic/a
rticleshow/89658962.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

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 PRICE DISCOVERY

 It is largely based on the total subscriptions received

 The price at which the issue gets subscribed atleast one time
 The book running lead managers in consultation with the issuer
would determine the pricing of the shares
Book Building Process

The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'.

The Issuer specifies the number of securities to be issued and the price band for the bids.

The Issuer also appoints syndicate members with whom orders are to be placed by the investors.

The 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 days.

Bids have to be entered within the specified price band.

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

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

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 THE PROCESS OF BIDDING

 The issuer to appoint a book runner (normally a

merchant banker)
 The issuer announces the price band and bid shares
 The issuer appoints syndicate members with whom
the investors could register their bids
•Internet Book Building System (Book Building & Fixed Price Issues (bseindia.com))

BSE offers a book building platform through the Book Building software branded as iBBS
- Internet Book Building System
•The software is operated by book-runners of the issue and by the syndicate members, for
electronically placing the bids on line real-time basis 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.
 THE PROCESS OF BIDDING

 Investors’ bids are entered into the electronic book – the process is
called bidding (it is similar to open auction)

 Bids less than floor price not accepted

 Bids could be revised for any number of time before the issue closes
REJECTIONS

 Application by unauthorised persons

 Applications with out dp id/client id
 Unsigned applications
 Incomplete applications
 Applications for shares at less than the final
pricing determined
Illustration of Book Building and Price Discovery Process

Bidders can bid at any price within

the price band
For instance, assume a price band
of Rs.20 to Rs. 24 per share,
issue size of 3,000 equity shares
and receipt of five bids from
bidders, details of which are shown
in the table below
 The illustrative book as shown below shows the demand for the shares of the
company at various prices and is collated from bids from various investors

Bid Bid Price Cumulative Subscription

Quantity (Rs.) Quantity

500 24 500 16.67%

1,000 23 1,500 50.00%

1,500 22 3,000 100.00%

2,000 21 5,000 166.67%

2,500 20 7,500 250.00%

 Illustration of Book Building and Price
Discovery Process

 The price discovery is a function of demand at various

prices. The highest price at which the issuer is able to
issue the desired number of shares is the price at
which the book cuts off, i.e., Rs. 22 in the above
example.
 All bids at or above this issue price and cut-off bids
are valid bids and are considered for allocation in the
respective categories.
 KEY FACTORS

Escrow
Red Herring
Account
Prospectus

Book Building
Process

Categories Price Band &

of Investors Cut-off Price
 Bidding
Minimum
Period &
Lot size
Bidding
Centers

Margin Revision of
Amount
Book Building Bids
Process

Basis of
Allotment
 Escrow Account

In a book building process, since the margin amount collected

is not the application money, the same will be deposited in an
escrow account. After the discovery of the price, the money
lying in the escrow account is transferred on the designated
date either in full or to the extent of the shares proposed to be
issued to the public issue account before allotment / allocation
of shares by the Board of Directors of the issuer
 Red Herring Prospectus

In a book building process, the issue price and on

some occasions even the quantum of shares
proposed to be issued is / are not known. Hence
the document prepared to invite / solicit
subscription is referred to as Red Herring
Prospectus
Quiz question

Investors can be classified into---  Answer Options—

Qualified Institutional Investors

A.1, 2, 3
1.

2. Non Institutional Investors

B.1,2,3,4
3. Retail Individual Investors
C.1,2,4,5
4. Employees of promoter companies D.1,2,3,4,5
5. Existing shareholders of the issuer E.1,2,3,5
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 Price Band
The lower end of the price band is the floor price and the upper
end of the price band is the cap price.
 The cap price is the price band should not be more than 20% of
the floor price.
The investors can opt to bid at any of the prices (including the
floor price and ceiling price) in multiples of Rs.1 within the price
band.
The issuer in consultation with the BRLMs can revise the price
band (upward or downward) during the period the bid is open
subject to keeping the bidding period open for a minimum of 3
days after the revision.
 Margin Amount

The money collected along with the application is referred to as

margin amount and need not necessarily be the total amount
payable for the option exercised. The syndicate members are
generally vested with powers to decide on the quantum /
percentage of margin payable along with the bid-cum-
application. However, the current practice is to stipulate 100%
margin to retain ad non-institutional investors ad no margin for
QIBs.