A corporate may raise capital in the primary market
by way of an initial public offer, rights issue or private placement. An
Initial Public Offer (IPO) is the selling of securities to the public in the
primary market. It is the largest source of funds with long or indefinite
maturity for the company.
What is Book Building?
SEBI guidelines defines Book Building as "a
process undertaken by which a demand for the securities proposed to be issued
by a body corporate is elicited and built-up and the price for such securities
is assessed for the determination of the quantum of such securities to be
issued by means of a notice, circular, advertisement, document or information
memoranda or offer document".
Book Building is basically a process used in
Initial Public Offer (IPO) for efficient price discovery. It is a mechanism
where, during the period for which the IPO is open, bids are collected from
investors at various prices, which are above or equal to the floor price. The
offer price is determined after the bid closing date.
As per SEBI guidelines, an issuer company can issue
securities to the public though prospectus in the following manner:
100% of the net offer to the public through book
building process
75% of the net offer to the public through book
building process and
25% at the price determined through book building.
The Fixed Price portion is conducted like a normal
public issue after the Book Built portion, during which the issue price is
determined.
The concept of Book Building is relatively new in
India. However it is a common practice in most developed countries.
Difference between Book Building Issue
and Fixed Price Issue
In Book Building securities are offered at prices
above or equal to the floor prices, whereas securities are offered at a fixed
price in case of a public issue. In case of Book Building, the demand can be
known everyday as the book is built. But in case of the public issue the demand
is known at the close of the issue.
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