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BOOKBOOK BUILDINGBUILDING
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Book-building is a process of price
discovery used in public offers. The issuer
sets a base price and a band price within
which the investor is allowed to bid forshares.
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y The company does not come out with a
fixed price for its shares; instead,
it indicates a price band that mentions the
lowest (referred to as the floor) and the highest (the cap) prices at which a share can
be sold.
y Bids are then invited for the shares. Each
investor states how many shares s/he wants
and what s/he is willing to pay for those
shares (depending on the price band).
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y The actual price is then discovered based
on these bids.
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y Every public offer through the book-
building process has a book running lead
manager (BRLM), a merchant banker, who
manages the issue.
y Further, an order book, in which the
investors can state the quantity of the
stock they are willing to buy, at a price within the band, is built. Thus the term
'book-building.'
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Three classes of investors can bid for the
shares:
1. Qualified Institutional Buyers(QIBs)
2. Retail investors:Anyone who bids for
shares under Rs 50,000 is a retail investor.
3.High net worth individuals and employees of the company.
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y Take the recent,Yes Bank , the floor price was Rs 38 and the band was from Rs 38 to Rs 45.
y
The investor had to bid for a quantity of shares he wished to subscribe to within this band.
y An issue through the book-building route
remains open for a period of 3 to 7 days and can be extended by another three days if the issuer decides to revise the floor price and the band.
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FIXED PRICING
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Fixed price issues are issues in which the
issuer is allowed to price the shares as he
wishes. The basis for the price is explained
in an offer document through qualitative and quantitative statements. This offer
document is filed with the stock
exchanges and the registrar of companies.
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Fixed priceFixed price vsvs book buildingbook building
methodmethod
ISSUE TYPE OFFER
PRICE
DEMAND PAYMENT RESERVATIONS
Fixed Price
Issues
Price at which the securities
are offered and would be
allotted is made known in
advance to the investors.
Demand for the securities
offered is known only
after the closure of the
issue .
100 % advance payment is
required to be made by the
investors at the time of
application.
50 % of the shares offered
are reserved for applications
below Rs. 1 lakh and the
balance for higher amount
applications.
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BOOK BUILDING ISSUEBOOK BUILDING ISSUE
OFFER PRICE DEMAND PAYMENTS RESERVATION
A 20% price band
is offered by the issuer within which investors
are allowed to bid and the final price
is determined by
the issuer only after closure of the bidding.
Demand for the
securities offered , and at various prices, is available
on a real time basis on the BSE
website during
the bidding period..
10 % advance
payment is required to be made by the QIBs
along with the application, while
other categories
of investors have to pay 100 %advance along
with the application.
50 % of shares
offered are reserved for QIBS, 35 % for
small investors and the balance
for all other
investors.
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y Globally, the book building method is favoured
for its mutually beneficial nature: investors get
the shares at a fair price that typically has
potential upside, and the issuing company receives fair compensation.
y However regionally it is likely to take some
time to adapt to this method. This will upset
some investors in the short term, who are used to making a lot of money from these fixed price
IPOs.