A Book Building process refers to allocating prices to securities like stocks and bonds in the financial market. Investors are asked to submit their bids specifying the quantity they want and the price they are willing to pay which is later used to determine the final and fair price of the security.
Content :
- Book Building Meaning
- Book Building Process
- Book Building Process Diagram
- Advantages Of Book Building
- Disadvantages of Book Building
- What Is the Book Building Process? – Quick Summary
- Book Building Process – FAQs
Book Building Meaning
Book Building means finalizing a fair and reasonable market price for securities at the Initial public offering (IPO). The investors submit their desired prices and quantities, helping to set the final price through their bids. This is done by the underwriters or bookrunners, generally the investment bank.
Book Building Process
The book-building process is a way for companies to determine the right price for their shares when they are going public for the first time through IPO. To do this, the company sets a price range with a minimum and maximum value.
Potential investors who want to buy these shares can place bids within this price range. After the bidding period ends, the company and its Book Running Lead Managers (BRLMs) use a weighted average method to calculate the final price, which is called the cut-off price. This cut-off price is the price at which the shares will be sold to the investors.
An example to illustrate how this works:
Let’s say a new company wants to issue 20,000 shares through an initial public offering (IPO). They set the price range for these shares at Rs. 10 to Rs.12 each. Interested investors can submit their bids for these shares within this Rs.10 to Rs.12 range. Here’s a hypothetical representation of the investors’ bids:
| Investors | No. of Shares | Bids (in Rs.) |
| Investor 1 | 1,000 | 11 |
| Investor 2 | 2,000 | 10.50 |
| Investor 3 | 3,000 | 11.50 |
| Investor 4 | 4,000 | 12 |
| Investor 5 | 5,000 | 12 |
Now, the company calculates the weighted average of these bid prices to determine the final cut-off price. Investors who bid at or above this cut-off price will be allocated shares, and those who bid lower won’t get any shares. The blocked funds in their accounts due to the IPO will be released.
Book Building Process Diagram
Image reference: https://img.brainkart.com/imagebk7/Nweh2zE.jpg
Advantages Of Book Building
The main advantage of book building is Price Discovery. This process allows companies to determine the best price for their securities by considering the bids from investors. By analyzing these bids, companies can set a fair market price for their shares.
Other such advantages are:
Efficient Capital Raising: It allows companies to raise the right amount of capital because the price is based on investor interest.
Broad Investor Participation: It encourages a wide range of investors to participate, from small to large, making the process inclusive.
Reduced Price Uncertainty: It minimizes the chances of underpricing or overpricing securities, benefiting both issuers and investors.
Enhanced Time and Marketing Opportunities: Book building allows more time for marketing and educating investors which creates greater awareness and interest in the offering.
Uncovering Concealed Demand: Book building helps issuers discover hidden pockets of demand that maximizes subscription rates and generates interest in the offered securities.
Disadvantages of Book Building
The main disadvantage of Book building is the risk of overpricing. In some cases, there is a risk of overpricing securities due to investor enthusiasm, which may lead to a lack of interest and reduced subscription.
Other such disadvantages are:
- Complexity and Cost: The book building process can be more complex and costly to implement compared to fixed-price offerings, as it involves additional administrative and regulatory requirements.
- Potential for Manipulation: The flexibility of book building may leave room for manipulation by certain market participants, impacting the integrity of the price discovery process.
- Exclusion of Retail Investors: Book building tends to attract institutional and high-net-worth investors, potentially excluding retail investors from participating in the offering.
- Time-Consuming: The book building process can be time-consuming, and delays in finalizing the price may affect the company’s capital-raising timeline.
- Limited Transparency: Compared to fixed-price offerings, book building may offer less transparency in the pricing mechanism, making it challenging for some investors to assess the fairness of the price.
What Is the Book Building Process? – Quick Summary
- The process of book building involves assigning prices to financial market securities such as stocks and bonds. During this process, investors are requested to submit their bids, indicating both the quantity they desire and the price they are prepared to pay.
- It enables companies to find a fair market price for their shares or bonds.
- Advantages of book building include price discovery, efficient capital raising based on investor interest, and broad participation of various investors.
- It reduces the uncertainty of pricing, provides more time for marketing and educating investors and helps discover hidden pockets of demand that maximize subscription rates and generate interest in the offered securities.
- Disadvantages include the risk of overpricing due to investor enthusiasm and the potential for manipulation by market participants.
- It can be more complex and costly compared to fixed-price offerings, involving additional administrative and regulatory requirements.
- Book building tends to attract institutional and high-net-worth investors, potentially excluding retail investors.
- There may be limited transparency in the pricing mechanism, making it challenging for some investors to assess the fairness of the price.
- Experience efficient collateral service in book building with Alice Blue. Alice Blue lets you pledge your stocks by 7:30 AM for enhanced participation in the capital market.
Book Building Process – FAQs
1. What Is the Book Building Process?
The process of book building involves assigning prices to financial market securities such as stocks and bonds. During this process, investors are requested to submit their bids, indicating both the quantity they desire and the price they are prepared to pay.
2. What is the 75% book building process?
In a 75% book building process, a company sells 75% of its shares through the book building method while the remaining 25% of shares are offered at a fixed price to retail investors.
3. What is the book building process of bonds?
The book building process for bonds involves investors submitting bids for the quantity of bonds they want and the interest rate they are willing to accept. The final bond price is determined based on these bids, allowing issuers to raise funds at the best available interest rate.
4. What is the difference between book building and IPO?
The main difference between an IPO and book building is that an IPO (Initial Public Offering) is the process of a company going public for the first time, while book building is a method used within the IPO process to determine the price of the company’s shares.
5. What are the types of book building?
The main types of book building are Accelerated Book Building and Partial Book Building. In Accelerated Book Building, shares are sold quickly with minimal marketing. On the other hand, Partial Book Building involves determining a portion of the issue price through investor bids, and the remaining part may have a fixed price or other mechanisms.
