COMMERCE PAPER No. : 10 CORPORATE LEGAL FRAMEWORK MODULE No. : 8 BOOK BUILDING
Subject COMMERCE
Paper No and Title Paper 10: Corporate Legal Framework Module No and Title Module 8: Book Building
Module Tag Com_P10_M8
COMMERCE PAPER No. : 10 CORPORATE LEGAL FRAMEWORK MODULE No. : 8 BOOK BUILDING
TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction
3. Book building
3.1. Characteristics 3.2 Process
3.3. Difference between Fixed Price and Book Building 3.4 Types of Investors in Book Building
3.5 Limitations
4. Information Memorandum 5 Red Herring Prospectus 6. Green Shoe Option 7. Summary
COMMERCE PAPER No. : 10 CORPORATE LEGAL FRAMEWORK MODULE No. : 8 BOOK BUILDING
1. Learning Outcomes
After studying this module, you shall be able to
Know the book building method of issuing shares
Learn the process of book building
Understand the difference between fixed price and book building methods
Evaluate the book building method
COMMERCE PAPER No. : 10 CORPORATE LEGAL FRAMEWORK MODULE No. : 8 BOOK BUILDING
2. Introduction
An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through:
Fixed price method,
Book building method or
Combination of Both
COMMERCE PAPER No. : 10 CORPORATE LEGAL FRAMEWORK MODULE No. : 8 BOOK BUILDING
3. Book Building
Book Building is basically a capital issuance process used in Initial Public Offers (IPO) and Follow-on Public Offers (FPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price.
The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.
The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.
In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner:
100% of the net offer to the public through book building route.
75% of the net offer to the public through the book building process and 25% through the fixed price portion.
Under the 90% scheme, this percentage would be 90% and 10%
respectively.
3.1 Characteristics of Book Building
Price Band: The range of price (the highest and the lowest price) at which offer for the subscription of securities is made, is known as ‘price band’. Investors may bid any price within the price band.
Floor Price: Floor price is the minimum price set by the lead manager in consultation with the issuer. This is the price at which the issue is open for subscription. Investors are free to place a bid at any price higher than the floor price.
Tendering Process: Book building involves inviting subscriptions to a public offer of securities, essentially through a tendering process. Eligible investors are required to place their bids for the number of shares to be issued and the price at which they are willing to invest, with the lead manager running the book. At the end of the cut off period, the lead manager determines the response to the issue in terms of the quantum of shares and the highest price at which demand is sufficient to match the size of the issue.
COMMERCE PAPER No. : 10 CORPORATE LEGAL FRAMEWORK MODULE No. : 8 BOOK BUILDING
Bid: The investor can place a bid with the authorized lead manager. In the case of equity shares, usually several
brokers in the stock exchange are also authorized by the lead manager. The investor fills up a bid-cum-application form, which gives a choice to bid for up to three optional prices. The price and demand options submitted by the bidder are treated as optional demands and are not cumulated.
Allotment: The lead manager, in consultation with the issuer, decides the price at which the issue will be subscribed and proceeds to allot shares to investors who have bid at or above the fixed price. All investors are allotted shares at the same fixed price. For any allottee, therefore the price would be equal to or less than the price bid.
Participants: There are 3 kinds of investors in a Book Building Issue:
(i) Retail Individual Investors (RII)- RII is an investor who applies for securities for a value of not more than R 200,000.
(ii) Non Institutional Investors (NII)- Any bid exceeding R 2,00,000 amount is considered in the NII category. NIIs are commonly referred to as high net-worth individuals.
(iii) Qualified Institutional Buyers (QIB) - QIBs are institutional investors who possess the expertise and funds to invest in the securities market. Mutual funds, financial institutions, scheduled commercial banks, insurance companies, provident funds, state industrial development corporations come in this category.
Generally, all investors, including individuals, eligible to invest in a particular issue of securities can participate in the book building process. However, if the issue is restricted to qualified institutional, as in the case of government securities, then, only those eligible can participate.
The Principal parties/intermediaries involved in a book building process are:
(i) The issuer/company.
(ii) The Book Running Lead Manager (BRLM) who is a Merchant Banker registered with SEBI.
(iii) The Syndicate Members who are intermediaries registered with SEBI and who are permitted to carry on activities as underwriters. Syndicate Members are appointed by Book Running Lead Manager.
3.2. Process of Book Building
The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'.
A draft offer document is sent to the SEBI.
Circulation of Information Memorandum
COMMERCE PAPER No. : 10 CORPORATE LEGAL FRAMEWORK MODULE No. : 8 BOOK BUILDING
The Issuer specifies the number of securities to be issued and the price band for the bids.
The Issuer also appoints syndicate members with whom orders are to be placed by the investors.
The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction.
The book normally remains open for a period of 5 days.
Bids have to be entered within the specified price band.
Bids can be revised by the bidders before the book closes.
On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels.
The book runners and the Issuer decide the final price at which the securities shall be issued.
Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share.
Final Prospectus specifying the price and size of the offer is issued.
Allocation of securities is made to the successful bidders. The rest get refund orders.
Every public offer through the book-building process has a book running lead manager (BRLM), a merchant banker, who manages the issue.
The investor had to bid for a quantity of shares he wished to subscribe to within this band. The upper price of the band can be a maximum of 1.2 times the floor price.
Further, an order book, in which the investors can state the quantity of the stock they are willing to buy, at a price within the band, is built. Thus the term 'book- building.'
An issue through the book-building route remains open for a period of 3 to 7 days and can be extended by another three days if the issuer decides to revise the floor price and the band.
3.3. Difference between Fixed Price and Book Building
Fixed Price Process Book Building process
Price at which the securities are offered/ allotted is known in advance to the investor.
Price at which securities will be offered/allotted is not known in advance to the investor. Only an indicative price range is known.
Demand for the securities offered Demand for the securities offered
COMMERCE PAPER No. : 10 CORPORATE LEGAL FRAMEWORK MODULE No. : 8 BOOK BUILDING
is known only after the closure of the issue
can be known everyday as the book is built.
Payment is made at the time of subscription wherein refund is given after allocation.
Payment is made only after allocation
3.4. Types of Investors in Book Building
There are 3 kinds of investors in a Book Building Issue:
Retail Individual Investors (RII)- RII is an investor who applies for stocks for a value of not more than Rs.100,000.
Non Institutional Investors (NII)- Any bid exceeding 1,00,000 amount is considered in the NII category. NIIs are commonly referred to as high net-worth individuals.
Qualified Institutional Buyers (QIB) - QIBs are institutional investors who possess the expertise and the financial muscle to invest in the securities market.
Ex- Mutual funds, financial institutions, scheduled commercial banks, insurance companies, provident funds, state industrial development corporations.
The Principal parties/intermediaries involved in a book building process are:
The issuer company,
The Book Running Lead Manager (BRLM) who is a Merchant Banker registered with SEBI,
The Syndicate Members who are intermediaries registered with SEBI and who are permitted to carry on activities as underwriters. Syndicate Members are appointed by Book Running Lead Manager.
3.5. Limitations of Book Building
While many big issues of the companies in India are coming through book building, book-building is appropriate for mega issues only. The issuer company should be fundamentally strong and well known to the investors. It works efficiently in matured market conditions as there is a possibility of price rigging on listing as promoters may try to bail out syndicate members.
1. Book-building is appropriate for mega issues only where the companies can adjust the attributes of the offer according to the preferences of the potential investors. It may not be possible in all kinds of public issues.
2. Book-building system is suitable only for the issuer companies which are fundamentally strong and well known to the investors.
3. The book-building system works very efficiently in matured market conditions.
COMMERCE PAPER No. : 10 CORPORATE LEGAL FRAMEWORK MODULE No. : 8 BOOK BUILDING
price of the securities. Retail investors find it difficult to participate in the issue on account of lack of expertise.
5. There is a possibility of price rigging on listing as promoters may try to bail out syndicate members.
4. Information Memorandum
(1) A public company making an issue of securities may circulate information memorandum to the public prior to filing of a prospectus.
(2) A company inviting subscription by an information memorandum shall be bound to file a prospectus prior to the opening of the subscription lists and the offer as a red-herring prospectus, at least three days before the opening of the offer. "Red-herring prospectus" means a prospectus which does not have complete particulars on the price of the securities offered and the quantum of securities offered.
(3) The information memorandum and red-herring prospectus shall carry same obligations as are applicable in the case of a prospectus.
(4) Any variation between the information memorandum and the red-herring prospectus shall be highlighted as variations by the issuing company and shall be individually intimated to the persons invited to subscribe to the issue of securities.
(5) In the event of the issuing company or the underwriters to the issue have invited or received advance subscription by way of cash or post-dated cheques or stock-invest, the company or such underwriters or bankers to the issue shall not encash such subscription moneys or post-dated cheques or stock-invest before the date of opening of the issue, without having individually intimated the prospective subscribers of the variation and without having offered an opportunity to such prospective subscribers to withdraw their application and cancel their post-dated cheques or stock-invest or return of subscription paid.
(6) Any application for subscription which is acted upon by the company or underwriters or bankers to the issue without having given enough information of any variations, or the particulars of withdrawing the offer or opportunity for cancelling the post-dated cheques or stock-invest or stop payments for such payments shall be void and the applicants shall be entitled to receive a refund or return of its post-dated cheques or stock-invest or subscription moneys or cancellation of its application.
(7) Upon the closing of the offer of securities, a final prospectus stating therein the total capital raised, whether by way of debt or share capital and the closing price of the securities and any other details as were not complete in the red-herring prospectus shall be filed in a case of a listed public company with the Securities and Exchange Board and Registrar, and in any other case with the Registrar only.
COMMERCE PAPER No. : 10 CORPORATE LEGAL FRAMEWORK MODULE No. : 8 BOOK BUILDING
5. Red Herring Prospectus
Red Herring Prospectus is a prospectus which does not have details of either price or number of shares being offered or the amount of issue. The issuer i.e. the company along with BRLM sets a base price and a price band within which the investors are allowed to bid for the shares. On the completion of the bidding process, the details of the final price are disclosed through a prospectus.
The red-herring prospectus is to be filled with ROC by unlisted public company, and with SEBI by listed public company, at least 3 days prior to the opening of the offer.
The final prospectus shall be similarly filed with ROC/SEBI on closure of the offer of securities indicating, inter alia, the total capital raised, closing price and other details as were not complete in the red-herring prospectus.
Where a company poses to issue capital to the public through book building process, the relevant red- herring prospectus shall contain the disclosures specified in Section 26 of the Companies Act, 2013.
6. Green Shoe Option
A Company making an initial public offer of equity shares through the book-building mechanism can avail of the GSO for stabilizing the post-listing price of its shares. The GSO means “an option of allotting shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism through a stabilising agent (SA).” GSO in the system of IPO using book-building method was recognised by SEBI in India through its new guidelines issued in 2003. According to the SEBI guidelines, “a company desirous of availing the GSO shall in the resolution of the general meeting authorising the public issue, seek authorization also for the possibility of allotment of further shares to the management team, as the SA”, who will be responsible for the price stabilisation process, if required. It owes its origin to the Green Shoe Company, which used this option for the first time in the world.
7. Summary
Book Building is essentially a process used by companies raising capital through Public Offerings) to aid price and demand discovery.
In this method, the issuer sets a base price and a band within which the investor is allowed to bid for shares.
Red Herring Prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.
