Meaning of book building
Book Building is the process by which an underwriter determines the price at which the shares must be sold in an Initial Public Offer (IPO). The process of price discovery requires the underwriter to call forth bids from various institutional investors such as fund managers and others. However, there always exists a risk of overpricing or undervaluing the shares.
Book Building Process
- The issuing company hires an investment bank to act as an underwriter who decides the price range of the security.
- The investment bank then, invites large scale buyers, fund managers and others, to submit bids on the shares.
- The book is then built through the listing and evaluation of the aggregated demands for the issue from the submitted bids. The final price of the security is termed as the cut-off price.
- The underwriter publicises the details of the bids in order to maintain transparency in the entire process.
- Shares are allocated to the accepted bidders, thereafter.
- The prices determined in the book building process does not suggest that the price is the best price, nor is it mandatory for the company to use the said price in an IPO.
Accelerated Book Building
- This method is resorted to when the company is in need of immediate financing. For example, accelerated book building can be resorted to when the firm is looking to acquire another firm.
- The finances are raised from the equity and not the debt market.
- The offer period stands only for a period of one or two days and there is little or no marketing done.
- The process is conducted in the form of an auction.
- The issuer awards the contract to the person offering the highest backstop price.
Difference Between the Book Building Process and the Fixed Price Issue
- In a book building process, the issue price is not disclosed in the beginning. In a fixed price issue, the price is decided at the beginning itself.
- The bids are made in a range in the book building process, whereas in a fixed price process there is only one price that the investors can purchase the shares at.
- The book building process is a more efficient price discovery mechanism.
- Please note that the price determined in the reverse book building process is higher than the market price.
