Book Building

Book Building: When it comes to determining the value of their shares, businesses located all over the globe resort to either book building or set pricing as a technique. The set price mechanism has gradually become irrelevant over the course of time, and the book-building mechanism has emerged as the standard method for pricing shares throughout the process of an initial public offering (IPO) (IPO). In this essay, we will investigate the process of book building, often known as how shares are priced in an initial public offering:

Book building is a process for price discovery that is employed in the stock markets when pricing securities for the first time. This mechanism is utilized in the stock markets. An initial public offering (IPO) of shares may either be carried out at a predetermined price or at a price that is left up to market forces. However, if the firm is unsure of the precise price at which to offer its shares, rather than deciding on a single specific amount, it may choose to settle on a price range instead.

The method of determining the price by first presenting the investors with a price range and then soliciting bids from them is referred to as “book building.” It is widely regarded as one of the most effective methods for determining prices for securities traded in the primary market. This is the preferred approach, which is advocated by all major stock exchanges, and as a consequence, it is followed in all of the main industrialized nations throughout the globe.

The Method of Book Building

The following is an in-depth description of the book-making process:

Appointment of Investment Banker The first thing to do is to choose an investment banker to serve in the role of a lead investment banker. The primary investment banker is responsible for carrying out the due diligence.

They provide a suggestion about the total amount of the capital issue that has to be carried out by the organization. Then, in addition to that, they provide a price range for the sale of the shares.

If the company’s management accepts the investment banker’s suggestions, the prospectus will include the price range that was offered by the investment banker. The price at the bottom of the range is referred to as the floor price, while the price at the top of the range is referred to as the ceiling price. The cut-off price is the last price at which securities are really offered for sale after all of the steps involved in the book-building process have been completed.

Taking Bids Potential buyers of the shares on the market are being asked to submit bids in order to purchase them. They will be asked to submit bids indicating the number of shares of the company that they are ready to purchase at a range of prices.

It is expected that the investment bankers will receive these bids together with the application money. It is important to point out that the gathering of bids is not being done by a solitary investment banker as is often believed. Instead, the lead investment banker may designate sub-agents to tap into their network specifically for the purpose of obtaining bids from a bigger number of persons. This can be done in order to facilitate the process.

Price Discovery: Once the lead investment banker has collected all of the offers, the team will start the process of price discovery. The price that was ultimately selected is calculated by taking the weighted average of all of the bids that were submitted to the investment banker. This price has been designated as the minimum acceptable price. The ceiling price is often the price at which trading is stopped for any problem that has gotten a significant amount of press and that the general public is anticipating.

Publicizing: Stock markets all across the globe mandate, in the interest of maintaining high standards of openness, that businesses are required to make public the specifics of the bids that were submitted to them. It is the responsibility of the lead investment banker to publish advertising that includes the specifics of the offers that were received for the acquisition of shares over a certain amount of time (for example, one week). In many different markets, the regulatory authorities have the authority and the right to physically check the bid applications if they so choose.

Settlement: In the last step, the application amount that was submitted by each of the different bidders has to be recalculated, and shares need to be assigned. For example, if a bidder has offered a price that is lower than the cut-off price, then a call letter must be issued asking for the remaining balance to be paid in order to secure the deal.

On the other side, if a bidder has bid a price that is more than the cut-off, then a refund check has to be executed for that person. As part of the settlement procedure, it is guaranteed that the investors will only have to pay the predetermined minimum amount in exchange for the shares that were offered to them.

A Portions of the Book Building

One further variant of the technique of book construction is known as partial book building. During this stage of the process, investment bankers accept bids from a select group of preeminent institutions rather than soliciting offers from the broader public. The cut-off price is determined after creating a weighted average of the prices offered by the bidders and comparing it to the starting price. After then, the price at which the cut-off was made is presented as a fixed price to retail investors. As a result, the bidding process is never conducted at the retail level but rather solely at the institutional level.

The discovery of pricing may also be accomplished by this method effectively. In addition, both the financial cost and the level of complexity associated with carrying out a partial book construction are rather modest.

To begin, the process of book building makes initial public offerings (IPOs) more flexible in terms of their price. Before the practice of book building became widespread, a significant number of initial public offerings (IPOs) were either underpriced or overvalued. This resulted in concerns for the corporation since, in the event that the issue was underpriced, the business stood to lose potential money.

If, on the other hand, the issue was priced too high, it would not reach its maximum number of subscribers. In point of fact, if it was subscribed for less than a certain percentage, the issue of securities had to be canceled, and the enormous expenditures expended over the issue simply had to be wiped off. This was the case in the event that it failed to meet the provided percentage. Because of the implementation of the book-building process, occurrences like these no longer take place, and as a result, the main market operates more effectively.