What is Book Building Method of IPO listing Process?

Initial Public Offer refers to listing of a company for the first time on the stock exchanges of India. A company has to fulfil the IPO eligibility criteria for listing. SME platforms in India, NSE Emerge and BSE SME have a set of eligibility norms for IPO and listing which differ from the Mainboard IPO listing. A company has to adhere to IPO process for listing purposes. One of such process includes pricing of IPO. There are two types of IPO pricing as discussed below. 

INTRODUCTION OF PRICING METHODS

In an Initial Public Offering (IPO) process, determining the pricing method for the company’s shares is a critical decision. The two primary methods for pricing shares are the Fixed Price Method and the Book Building Method. Both methods play a pivotal role in establishing the fair value of shares, directly impacting the public's subscription level, including anchor investors.

The pricing of shares during an IPO is not merely a financial decision but a strategic one. It reflects the company's valuation, market demand, and growth prospects. A well-considered pricing strategy ensures that the shares are attractive to investors while maintaining a balance between raising sufficient capital for the company and achieving post-IPO success. Ultimately, the pricing mechanism influences the overall reception of the IPO in the market, investor confidence, and the company's market performance post-listing.

What is Book Building and Fixed price method of IPO?

The Book Building Method is a dynamic process used during an IPO to determine the price and demand for securities. Under this method, the company collaborates with merchant bankers to establish a price band. Potential investors submit bids indicating the quantity of shares they are willing to purchase and the price they are willing to pay within this range. This demand-driven approach helps assess the fair market value of the shares and ensures the final price aligns with market dynamics and investor expectations. The method also aids in determining the quantum of shares to be allotted.

 

In contrast, the Fixed Price Method involves a straightforward approach where the price of the shares is predetermined by the company in consultation with the merchant banker. This price is set before the IPO opens for subscription and remains fixed throughout the offer period. Investors are required to apply for shares at this set price, simplifying the process but potentially limiting demand-driven price optimization.

 

How book building process is done as per SEBI (ICDR) REGULATIONS?

An Issuer proposing to Issue specified securities through the book building process on NSE Emerge or BSE SME platform and BSE and NSE exchanges of India, shall comply with the requirements of SCHEDULE XIII - BOOK BUILDING PROCESS updated and amended from time to time. This regulation has 4 parts and each part provide the regulations for Book Building Process.

 

• Appointment of Lead Manager (s)

In case of Book Building Process, an Issuer company shall appoint one or more than one merchant banker as lead manager with specific rights and obligation mentioned in the offer document.

 

• Appointment of syndicate Member (s)

The Issuer in case of Book Building process should appoint syndicate member. “Syndicate member” means an intermediary registered with the Board and who is permitted to accept bids, applications and place orders with respect to the Issue and carry on the activity as an underwriter.

 

• Underwriting

The Book Running Lead manager(s) of an IPO are required to compulsorily underwrite the Issue, with syndicate members sub-underwriting under their direction. This arrangement must be formalized through an underwriting/sub-underwriting agreement before filing the DRHP or red herring prospectus (RHP). The prospectus must disclose and include the final details of the underwriting arrangement, specifying the actual number of shares underwritten, prior to its submission to the Registrar of Companies. In the event of under-subscription, any shortfall must be covered by the lead manager(s), and this responsibility must be clearly outlined in the inter-se allocation of responsibilities as per Schedule I. Merchant Bankers in India have the role and responsibility for listing as per the SEBI (ICDR) Regulations. 

 

• Agreement with Stock Exchange

The Issuer is required to enter into an agreement with one or more stock exchanges that offer electronic bidding systems for book building. This agreement must outline the rights, duties, responsibilities, and obligations of both the Issuer and the stock exchange(s). Additionally, the agreement can include provisions for a dispute resolution mechanism to address potential conflicts between the Issuer and the stock exchange.

 

• Appointment of stock brokers as bidding/collection centres

Lead managers or syndicate members must appoint SEBI-registered stockbrokers who are members of the stock exchange(s) to accept bids and place orders with the Issuer. These brokers must be financially capable of addressing any client/investor defaults. For IPOs using the Application Supported by Blocked Amount (ASBA) mechanism, authorized intermediaries such as self-certified syndicate banks, registrars, share transfer agents, depository participants, and stockbrokers can also accept and upload application details into the electronic bidding system of the stock exchange(s). These entities are considered bidding/collection centres. The Issuer is required to pay reasonable commissions or fees to these intermediaries for their services, but they are prohibited from charging service fees to their clients/investors. Additionally, stock exchanges must ensure that stockbrokers do not levy service fees on clients/investors for their services.

 

• Price not to be disclosed in the Draft Red Herring Prospectus

The draft red herring prospectus shall contain the total Issue Size which may be expressed either in terms of the total amount to be raised or the total number of specified securities to be Issued and shall not contain the price of the specified securities. In case the offer has an offer for sale and/or a fresh Issue, each component of the Issue may be expressed in either value terms or number of specified securities.

 

• Floor price and price band

The Issuer may disclose the floor price or price band in the Red Herring Prospectus (RHP). If the Issuer chooses not to disclose the price band or floor price in the red herring prospectus, it must include a statement that such details will be disclosed at least two working days prior to the Issue's opening in the case of an initial public offer

 

The cap of the price band should not be higher by more than 20 % of the floor price of the price band.

The price band can be revised during the bidding period, provided the maximum revision on either side shall not exceed 20 %. i.e. floor of price band can move up or down to the extent of 20 per cent of floor of the price band disclosed in the red herring prospectus.

 

• In case of a revision in the price band, the Issuer shall extend the bidding (Issue) period disclosed in the red herring prospectus, for a minimum period of three working days, subject to the total bidding (Issue) period not exceeding ten working days.

 

• Bidding process

The bidding process shall be conducted through an electronically linked transparent facility provided by stock exchanges. The lead managers must ensure that syndicate members have sufficient infrastructure for timely data entry of bids, with at least one electronically linked terminal available at each bidding centre. During the bidding period, applicants can place bids through stock brokers, self-certified syndicate banks, registrars and share transfer agents, or depository participants. Applications must be supported by a blocked amount. 

 

Qualified institutional buyers (QIBs) must bid through vetted stock brokers. Daily demand, including anchor investor allocations, shall be displayed graphically on bidding terminals and stock exchange websites. Retail investors may withdraw or revise bids until the Issue closes, while QIBs and non-institutional investors (NII) cannot withdraw or reduce their bids. The Issuer may close QIB bidding one day early if the bidding period lasts a minimum of three days and this intention is disclosed in the red herring prospectus. QIB names shall remain confidential, and retail investors can bid at the "cut-off" price instead of a specific price.

 

• The Issuer, in consultation with the lead managers, shall determine the final Issue price based on the bids received. Once the final price is determined, the number of specified securities to be offered or the Issue size will be finalized. All bidders whose bids are at or above the final Issue price will be considered for allotment of the specified securities.
• A copy of the prospectus, which shall include the price and the number of specified securities, shall be filed by the Issuer with the Registrar of Companies. 

 

• Allocation in case of Book Building Method of SME IPO

In the net offer category, the allocation of shares will be as follows: at least 35% will go to retail individual investors, at least 15% will go to non-institutional investors, and up to 50% will be allocated to qualified institutional buyers (QIBs), with 5% of this reserved for mutual funds. If there are any unclaimed shares in the retail or non-institutional categories, they can be reallocated to other categories. Additionally, mutual funds can also receive shares from the remaining allocation for QIBs beyond the 5% reserved for them.

 

What role does IPO Advisors play in successful IPO?

IPO Advisors play an important role in successful launch of an IPO. Their advisory role from IPO readiness, selecting the best merchant banker in India for SME IPO, various due diligence activities and IPO valuation guides the company throughout the IPO Issue and listing process. IPO platform in India provides information on upcoming IPOs on NSE Emerge and BSE SME and list of merchant bankers and anchor investors. Role of IPO advisor is important in the success of the listings. 

 

Investing in an IPO involves understanding the different investor categories such as QIBs, NIIs/HNIs, RIIs, and Anchor Investors, each with distinct quotas and criteria. Whether you’re a retail investor or an institutional player, choosing the right category based on eligibility and investment amount is key. Explore how these categories work, their quotas, and what makes each unique to assist in informed decision-making .

 Guides SMEs in selecting suitable, experienced bankers

 

What is the difference between Book Building and Fixed Price Methods for IPO?

Based on the information from the document and additional sources, the following table highlights the differences between the Book Building and Fixed Price methods of IPOs:

Aspect	Book Building Method	Fixed Price Method
Pricing Mechanism	A price band is set, and investors bid within the range. The final price is determined based on demand.	The price of the share is decided upfront by the Issuer in consultation with the merchant banker.
Price Range/Band	A price band is established (e.g., not exceeding 20% of the floor price).	No price range; the exact price is fixed and communicated.
Demand Assessment	The demand is gauged during the bidding process, helping optimize price discovery.	Demand is not assessed before price determination.
Investor Involvement	Investors submit bids indicating the number of shares and the price they are willing to pay.	Investors apply at the predetermined fixed price.
Pricing	Pricing is based on market demand.	Pricing is predetermined without direct market feedback.
Cost Implications	Slightly higher costs due to additional stock exchange charges for book-building software.	Generally slightly lower, as there are no charges for demand estimation.
Allotment Process	Shares are allocated to bidders at or above the determined price, starting with the highest bid.	Shares are allocated based on applications at the fixed price.
Investor Categories	Institutional investors play a significant role in determining demand and price.	Focus on retail and small investors, with less influence from institutional investors.
Market Conditions	Best suited for volatile or uncertain market conditions due to flexible pricing.	Best suited for stable markets where price predictability is higher.

 

Benefits of Book Building Method

Market driven pricing- The book building process allows the price to be determined based on the Investors demand and market conditions. So, it reflects the true market value of the shares leading to fair and accurate valuation.

Investor confidence- Fair and market driven pricing results in higher investor confidence and ensures greater participation in Initial Public Offerings.

Allocation of shares- Book building process allows better allocation among the different categories of investors.

Regulatory Support- Book building process is a well regulated method for IPOs as laid down under SEBI ICDR Regulations. Regulatory support ensures transparency.

Additional Notes

• The Book Building method is often preferred for larger IPOs due to its dynamic pricing and demand-based approach.
• The Fixed Price method is simpler but may result in suboptimal pricing if market conditions are not accurately predicted.

 

Conclusion

In conclusion, both the Book Building Method and the Fixed Price Method serve as fundamental pricing approaches for Initial Public Offerings (IPOs), with distinct advantages and limitations depending on the specific needs of the issuer and market conditions. The Book Building Method offers a dynamic, demand-driven pricing model that is better suited for volatile or uncertain market environments, ensuring a more accurate market valuation of shares. It fosters investor confidence by aligning the final share price with the prevailing market demand, thus encouraging greater participation and transparency.

On the other hand, the Fixed Price Method provides a simpler, more straightforward approach, making it ideal for stable market conditions where price predictability is higher. However, it may result in suboptimal pricing if the market conditions are not accurately assessed, as it lacks the flexibility of demand-based price discovery.

The regulatory framework provided under the SEBI ICDR Regulations ensures that the Book Building Process is well-supported, with provisions for the appointment of lead managers, underwriting agreements, and clear allocation processes. This structured approach to pricing and share allotment helps in maintaining fairness and transparency in the IPO process.

Ultimately, the choice between these two methods should be driven by IPO Size, the market environment, and the issuer’s strategic goals. For larger IPOs or those in uncertain markets, the Book Building Method is typically the preferred choice, offering a more market-responsive pricing strategy. Conversely, for smaller, less complex issues, the Fixed Price Method can be an effective solution, providing simplicity and clarity for investors.