Book Building Method

BOOK BUILDING METHOD

A method of marketing the shares of a company whereby the quantum and the price of the securities to be issued will be decided on the basis of the 'bids' received from the prospective shareholders by the lead merchant bankers is known as 'book-building method. Under the book-building method, share prices are determined on the basis of real demand for the shares at various price levels in the market. For discovering the price at which issue should be made, bids are invited from prospective investors from which the demand at various price levels is noted. The merchant bankers undertake full responsibility for the same. The option of book-building is available to all body corporate, which are otherwise eligible to make an issue of capital to the public. The initial minimum size of issue through book-building route was fixed at Rs.100 crores. However, beginning from December 9, 1996 issues of any size will be allowed through the book-building route. Book-building facility is available as an alternative to firm allotment. Accordingly, a company can opt for book-building route for the sale of shares to the extent of the percentage of the issue that can be reserved for firm allotment as per the prevailing SEBI guidelines. It is therefore possible either to reserve securities for firm allotment or issue them through the book-building process. The book-building process involves the following steps:

1.     Appointment of book-runners:

The first step in the book-building process is the appointment by the issuer company, of the book-runner, chosen from one of the lead merchant bankers. The book-runner in turn forms a syndicate for the book-building. A syndicate member should be a member of National Stock Exchange (NSE) or Over-the-Counter Exchange of India (OTCEI). Offers of bids‘ are to be made by investors to the syndicate members, who register the demands of investors. The bid indicates the number of shares demanded and the prices offered. This information, which is stored in the computer, is accessible to the company management or to the book-runner. The name of the book-runner is to be mentioned in the draft prospectus submitted to SEBI.

2.  Drafting prospectus:

The draft prospectus containing all the information except the information regarding the price at which the securities are offered is to be filed with SEBI as per the prevailing SEBI guidelines. The offer of securities through this process must separately be disclosed in the prospectus, under the caption ‘placement portion category’. Similarly, the extent of shares offered to the public shall be separately shown under the caption 'net offer to the public'. According to the latest SEBI guidelines issued in October 1999, the earlier stipulation that at least 25 percent of the securities were to be issued to the public has been done away with. This is aimed at enabling companies to offer the entire public issue through the book-building route.

3.     Circulating draft prospectus

A copy of the draft prospectus filed with SEBI is to be circulated by the book-runner to

the prospective institutional buyers who are eligible for firm allotment and also to the intermediaries who are eligible to act as underwriters. The objective is to invite offers for subscribing to the securities. The draft prospectus to be circulated must indicate the price band within which the securities are being offered for subscription.

4.     Maintaining offer records:

The book-runner maintains a record of the offers received. Details such as the name and the number of securities ordered together with the price at which each institutional buyer or underwriter is willing to sub scribe to securities under the placement portion must find place in the record. SEBI has the right to inspect such records.

5.     Intimation about aggregate orders:

The underwriters and the institutional investors shall give intimation on the aggregate of

the offers received to the book-runner.

6.     Bid analysis:

The bid analysis is carried out by the book-runner immediately after the closure of the bid  offer date. An appropriate final price is arrived at after a careful evaluation of demands at various prices and the quantity. The final price is generally fixed reasonably lower than the possible offer price. This way, the success of the issue is ensured. The issuer company announce the pay-in-date at eh expiry of which shares are allotted.

7.  Mandatory Underwriting:

Where it has been decided to make offer of shares to public under the category of ‘Net Offer to the Public’; it is incumbent that underwritten. In case an issue is made through book-building route, it is mandatory that the portion of the issue offered to the public be underwritten. This is the purpose, an agreement has to be entered into with the underwriter by the issuer. The agreement shall specify the number of securities as well as the price at which the underwriter would subscribe to the securities. The book-runner may require the underwriter of the net offer to the public to pay in advance all moneys required to be paid in respect of their underwriting commitment.

8.     Filling with ROC:

A copy of the prospectus as certified by the SEBI shall be filed with the Registrar of

Companies within two days of the receipt of the acknowledgement card from the SEBI.

9.     Bank accounts:

The issuer company has to open two separate accounts for collection of application

money, one for the private placement portion and the other for the public subscription.

10.                        Collection of Completed Applications:

The  book-runner  collects  from  the  institutional  buyers  and  the  underwriters  the

application forms along with the application money to the extent of the securities proposed to be allotted to them or subscribed by them. This is to be done one day before the opening of the issue to the public.

11.                        Allotment of securities:

Allotment for the private placement portion may be made on the second day from the

closure of the issue. The issuer company, however, has the option to choose one date for both the placement portion and the public portion. The said date shall be considered to be the date of allotment for the issue of securities through the book-building process. The issuer company is permitted to pay interest on the application moneys till the date of allotment or the deemed date of allotment provided that payment of interest is uniformly given to all the applicants.

12. Payment schedule and listing:

The book-runner may require the underwriters to the 'net offer to the public to pay in advance all moneys required to be paid in respect of their underwriting commitment by the eleventh day of the closure of the issue. In that case, the shares allotted as per the private placement category will become eligible for being listed. Allotment of securities under the public category is to be made as per the prevailing statutory requirements.

13. Under-subscription:

In the case of under-subscription in the ‘net offer to the extent of under-subscription is to be permitted from to the condition that preference is given to the individual investors. In the case of under- subscription in the placement portion, spillover is to be permitted from the net offer to the public to the placement portion.

Advantages of Book Building

Book-building process is of immense use in the following ways: 1. Reduction in the duration between allotment and listing 2. Reliable allotment procedure 3. Quick listing in stock exchanges possible 4. No price manipulation as the price is determined on the basis of the bids received.