Define Book Building

Meaning

Book Building is essentially a process used by companies raising capital through Public Offerings-both Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.

There are two alternatives in Book Building

75% Book Building process

Offer to public through Book Building process.

75% Book Building Process

The option for 75% Book Building is available subject to the following conditions:

The prospectus should indicate separately “placement portion category” i.e. issue of securities through the Book Building process.

Securities available to the public i.e. ‘net offer to the public’ should be separately identified.

A minimum of 25% of the securities is required to be offered to the public is also applicable.

The net offer to the public must be mandatorily underwritten.

The draft prospectus containing all the information should be filed with the SEBI. However price at which the securities are offered need not be furnished.

The issuer company should nominate a book runner from among the lead merchant bankers to the issue. His name should be mentioned in the prospectus.

The book runner should circulate the copy of the draft prospectus filed with the SEBI to

Institutional buyers who are eligible for firm allotment

Intermediaries eligible to act as underwriters, inviting offers for subscription to the securities.

Process

The price band within which the securities are being offered for subscription should be indicated in the draft prospectus circulated. The book runner should maintain a record of

The names and number of securities ordered

The price at which the institutional buyer/underwriter is willing to subscribe to the securities under the placement portion.

The underwriters should maintain a record of the orders received by him for subscribing to the issue out of the placement portion. He should intimate the book runner the aggregate of these offers. The book runner and issuing company fix the price at which the securities would be offered to the public. The issue price for the placement portion and offer to the public should be the same. After fixation of the price, the underwriter should execute an agreement with the issuer indicating the number of securities as well as the price at which the former would subscribe to the securities. The prospectus should be filed with the ROCs within two days of the determination of the issue price.

Two different accounts for collection of application money should be opened by the issuer company, one for the private placement portion and the other for the public subscription. The application forms with application money should be collected one day prior to the opening of the issue to the public. The money should be collected from the institutional buyers and underwriters to the extent of securities proposed to be allotted to them/subscribed by them. The allotments for the private placement portion should be made on the second day from the closure of the issue. The issuer company may have one date of allotment which should be deemed as the date of allotment for the issue of securities through the book building process. This is to ensure that the securities allotted under the placement portion and public portion are at the same rate and maintain equality. The issues under the private placement category would be eligible to be listed if the underwriters were required to pay all money required to be paid as per the commitment by the eleventh day of the closure of the issue. The securities allotments under public category are eligible to be listed and the allotment should be made as per SEBI guidelines.

Under Subscription

In the case of net offer to the public category and under the placement portion the spill over to the extent of under subscription should be permitted from the placement portion. However, preference would be given to individual investors. In the case of placement portion, spillover would be permitted from the net offer to public.

Payment of Interest on Application Money

Interest on application money till the date of allotment or deemed date of allotment uniformly to all the applicants should be paid by the issuer company.

Records of Book Building Process

Records of the Book Building process should be maintained by the book runner and other intermediaries. The SEBI has the right to inspect those records.

Offer to Public Through Book Building Process

An issuer company may make an issue of securities to the public in the following manner

75% of net offer to the public through the Book Building Process and 25% at the price determined through the Book Building. Reservation to the extent of the percentage specified in the relevant SEBI guidelines can be made only to promoters, permanent employees of the issuer company, permanent employees of the promoting company, shareholders of the promoting companies, shareholders of group companies (in case of existing company).

Conditions

Eligible merchant bankers should be appointed as book runners by the issuing company.

The draft prospectus should contain the names of book runners.

Agreement should be executed between the Issuer Company and stock exchanges. The stock exchanges should have the requisite system of online offer of securities. The agreement should specify among other things, their mutual rights, duties, responsibilities and obligations.

The agreement should also provide for dispute resolution mechanism between them.

The lead merchant bankers shall be the lead book runner. The other eligible merchant bankers shall be co-book runners.

If there are more than one book runner, the names of all such book runners who have submitted the due diligence certificate to the SEBI should be mentioned on the front cover page of the prospectus.

The prospectus should disclose that for any complaint pertaining to the issue the investor may contact any of such book runners.

Responsibilities of lead book runner

Building the books

Book runners shall appoint syndicate members from among the SEBI registered intermediaries who are permitted to carry on activity as ‘underwriters’. The book runners/syndicate members should appoint SEBI registered brokers of the stock exchange. These brokers should be financially capable of honoring their commitments arising out of defaults of their clients/investors.

The lead merchant banker should file with the SEBI the draft prospectus containing all the disclosures as laid down by the SEBI.

The total size of issue should be mentioned in the draft prospectus.