Book Building

1.       Book Building

Companies have different ways and options to raise funds. While an unlisted company can come out with an initial public offer (IPO), a listed firm can raise through follow on public offer (FPO) or right issue. IPOs or FPOs can be issued either at a fixed price or a range can be given to investors to choose a price.

The methodology of issuing securities by giving a price range is known as book building method. A book building is a price discovery mechanism.SO  Book building refers to the process of generating, capturing, and recording investor demand for shares during an Initial Public Offering (IPO), or other securities during their issuance process, in order to support efficient price discovery.

Under this methodology, issuers don't fix up a single price for the securities but provide a price range. Investors put their bid within the price range and depending on the demand supply of the units, the final price is decided. The lowest price of the range is called the floor price and the highest price is called as cap price. Cut off price is the price at which the shares are allotted.

What is the process for book building?

The whole process starts with the nomination of the lead manager, an investment banker who helps in taking the issue to the market by the fund raising company. The lead manager and the issuing company decide the price band and the size of the issue. Syndicate members are appointed to receive orders from investors. Generally the issue remains open for five days.

During the subscription period, investors make their bidding within the decided price range. After the closing of book building period, the lead manager and issuing company determine the issue price at which all the securities can be sold. Finally the securities are allotted to investors.