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Bookbuilding is here to stay

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The IPO market has undergone a sea change. We as investors can only sit back and remember the
days of under priced IPO’s in the Controller of Capital issue days-where getting allotment was akin to
winning a lottery. Then came the era of free pricing-when many an over priced issue hit the market ,
still there were some pearls to be found as suddenly some sectors got re rated by the market and the
price of the issues seemed reasonable. Then in 1998 Securities and Exchange Board of India (SEBI)
allowed every issuer of equity shares of Rs 250 million and above to have an option to make an issue
through the Book Building Process. The age of the big boys had arrived-the small investor’s role in the
IPO market was to get marginalised.

Book Building refers to the collection of bids from investors, which is based on an indicative price range,
the issue price being fixed after the bid closing date. The principal intermediaries involved in a book
building process are the company, Book Running Lead Manager (BRLM) and syndicate members who
are intermediaries registered with SEBI and eligible to act as underwriters. Syndicate members are
appointed by the BRLM. The book building process is undertaken basically to determine investor
appetite for a share at a particular price. It is undertaken before making a public offer and it helps
determine the issue price and the number of shares to be issued. The process begins with consultations
between issuer company, the fund managers and the institutional investors. The above process is used
to derive a price-band with a median point at which the demand for the company’s stock is maximum.
The issuer company, in tandem with the lead manager and the book runner, then fixes a price band for
the issue. The investor is informed of the price band and he then bids at a price he thinks appropriate.

The bidding is done just like an open auction. The bidding period is kept open for at least five working
days. The advertisement announcing the bidding contains the date of the opening of the offer and the
closing date. The issue document contains the name of syndicate members who are entitled to receive
the bids. Even the offer document contains the conditions of accepting the bids and the procedure of
bidding. The bidding centers are electronically connected to maintain transparency and also eliminate
the time lag between making and receiving of the bid. Individual and institutional investors have to
place their bids only through the ‘syndicate members’ who have the right to vet the bids. The bids can
be revised innumerable number of times before the issue closes. To maintain transparency in the
bidding process, at the end of every bidding session the demand for the issue is shown in the graph
format on the terminals.

Once the company gets various bids from the investor, it decides the final price at which it is willing to
issue the stock. Since the company has already decided the quantum of funds it wants to raise it
finalizes the number of shares it will now issue at the price fixed. The issue price for the placement
portion and offer to the public shall be the same.

As per the SEBI rules known to everyone, a company going public has to offer its minimum 25 per cent
of issued post-issue equity to the public and maximum of 75 per cent post issue equity can remain with
the promoters. However, by a recent amendment large software companies making an issue of over
Rs.200 crores (including premium) need offer only a minimum of 10 per cent of post issue equity. Out
of the total public issue size, 90 per cent of the issue can be offered through book building process
while only 10 per cent of the issue can be offered via fixed price portion. Out of the book building
portion, a minimum of 10 per cent of the issue size has to be reserved for retail bidders while 75 per
cent of the issue can be offered to wholesale bidders.

A retail investor in book building process is an investor who has to bid for a minimum of 100 equity
shares and in multiples of 50 equity shares thereafter subject to a maximum of 2000 equity shares. In
case of wholesale bidders the bid has to for a minimum of 500 equity shares and in multiples of 50
equity shares thereafter. In case of over-subscription in the retail category, allocation will be made on a
proportionate basis and in consultation with the regional stock exchange. In case of balance book-built
portion the same shall be available to wholesale bidders and the company in consultation with the

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Understanding Bookbuilding http://www.karvy.com/articles/bookbuilding.htm

Allocation Committee has the discretion to allocate to any of the investors, who have bid, at or above
the issue price in wholesale bidder category.

While bidding for the equity shares of the company in a book built portion, each bidder shall, with the
submission of the bid-cum-application form, draw a cheque/demand draft/stockinvest for the maximum
amount of this bid in favor of the escrow account of the escrow collection bank. Bid form accompanied
by cash is not accepted.

However, the syndicate member(s) at their discretion may waive such requirement of payment at the
time of submission of the did form for wholesale bidders. Where such payment at the time of bidding is
waived at the discretion of the syndicate member or where there is a shortfall as a result of cut-off
price being more than highest price in the indicative price band, the issue price or the difference, as the
case may be would be paid, favoring the escrow account within 4 days on communication by the BRLM
of the list of bidders who have been allocated equity shares to the syndicate members.

As a result of the book building process , by merely offering 6.25 per cent of the post issue equity, the
shares of the company can get listed on the major stock exchanges like NSE and BSE. Here, after
listing, due to low floating stock, it becomes very easy for the vested interests to manipulate the price.
Also, out of 18.75 per cent of the post issue equity, reserved for wholesale bidders, the said shares are
conveniently allotted by the company and BRLM to persons of their choice and selection. Ironically,
these allottees can get the allotment of shares without paying a single penny along with their bids. Due
to these flaws and inadequate provisions, SEBI has thought of streamlining book building norms and it
was decided that to avoid conflict of interests during book-building and maintain the integrity of the
process and an arms-length relationship between those involved in book building and their associates.

Though still a new concept, book building is here to stay and represents a capital market which is in the
process of maturing.

Aru Srivastava

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