3.8 What is Book Building?
It is the process of fixing the price of a share based on applicants’ bids. It refers to the collection of bids from investors based on a floor price (minimum price) which is indicated before the opening of the bidding process. The issue price is fixed after the bid's closing date.
1) Price Band-Floor Price And Cap Price:
Floor price is the minimum price at which bids can be made and cap price is the maximum price one can bid for. For example, when Reliance Power offered their IPO, the price band was between Rs 405 (floor price) and Rs 450 (cap price) per share. Once the band is fixed, investors cannot bid for a price less than floor price or more than the cap price.
2) Cut-Off :
If the investors are not sure about the price to bid and are ready to accept any price (in the price band) fixed by the company then they can write ‘cut-off’ on the application in the space provided. It means the investor is willing to buy at the final price determined by the company at the conclusion of the book building process. In this case the investors have to pay the floor price (Rs 405 per share) at the time of application and if the price discovered is higher, the balance needs to be paid once allocation is confirmed to the investor.
What Is The Difference Between Book Building And Normal Price?
The price at which securities will be allotted is not known in case of a book building offer. And in case of a normal public issue the price is known in advance to the investor. In case of book building, the demand can be known every day as the book is built. In case of a normal public issue, the demand is known only at the close of the issue.
In case of an issuer company makes an issue of 100% of the net offer to public through 100% book building process
- Not less than 35 % of the net offer to the public shall be available for allocation to retail individual investors.
- Not less than 15 % of the net offer to the public shall be available for allocation to non institutional investors i.e. investors other than retail individual investors and Qualified Institutional Buyers.
- Not more than 50% of the net offer to the public shall be available for allocation to QIB.