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IPOs
What is an IPO?
An IPO is an abbreviation for Initial Public Offer. When a
company goes public for the first time or issues a fresh stock
of shares, it offers it to the public directly. This happens
in the primary market. The primary market is where a company
makes its first contact with the public at large.
What is Book Building?
Book Building is a process used for marketing a public offer
of equity shares of a company and is a common practice in
most developed countries. Book Building is so-called because
the collection of bids from investors are entered in a "book".
These bids are based on an indicative price range. The issue
price is fixed after the bid closing date.
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How is the book built?
A company that is planning an initial public offer (IPO) appoints
a category-I Merchant Banker as a bookrunner. Initially, the
company issues a draft prospectus which does not mention the
price, but gives other details about the company with regards
to issue size, past history and future plans among other mandatory
disclosures. After the draft prospectus is filed with
the SEBI, a particular period is fixed as the bid period and
the details of the issue are advertised.The book runner builds
an order book, that is, collates the bids from various investors,
which shows the demand for the shares of the company at various
prices. For instance, a bidder may quote that he wants 50,000
shares at Rs.500 while another may bid for 25,000 shares at
Rs.600. Prospective investors can revise their bids at anytime
during the bid period, that is, the quantity of shares or
the bid price or any of the bid options. Usually, the bid
must be for a minimum of 500 equity shares and in multiples
of 100 equity shares thereafter. The book runner appoints
a syndicate member, a registered intermediary who garners
subscription and underwrites the issue.
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On what basis is the final price decided?
On closure of the book, the quantum of shares ordered and
the respective prices offered are known. The price discovery
is a function of demand at various prices, and involves negotiations
between those involved in the issue. The book runner and the
company conclude the pricing and decide the allocation to
each syndicate member.
When is the payment for the shares
made?
The bidder has to pay the maximum bid price at the time of
bidding based on the highest bidding option of the bidder.
The bidder has the option to make different bids like quoting
a lower price for higher number of shares or a higher price
for lower number of shares. The syndicate member may waive
the payment of bid price at the time of bidding. In such cases,
the issue price may be paid later to the syndicate member
within four days of confirmation of allocation. Where a bidder
has been allocated lesser number of shares than he or she
had bid for, the excess amount paid on bidding, if any will
be refunded to such bidder.
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Is the process followed in India different
from abroad?
Unlike international markets, India has a large number of
retail investors who actively participate in IPOs. Internationally,
the most active investors are the Mutual Funds and Other Institutional
Investors. So the entire issue is book built. But in India,
25 per cent of the issue has to be offered to the general
public. Here there are two options to the company. According
to the first option, 25 per cent of the issue has to be sold
at a fixed price and 75 per cent is through Book Building.
The other option is to split the 25 per cent on offer to the
public (small investors) into a fixed price portion of 10
per cent and a reservation in the book built portion amounting
to 15 per cent of the issue size. The rest of the book built
portion is open to any investor.
What is the advantage of the Book Building
process versus the normal IPO marketing process?
The Book Building process allows for price and demand discovery.
Also, the costs of the public issue is reduced and so is the
the time taken to complete the entire process.
How is Book building different from
the normal IPO marketing process as practiced in India?
Unlike in Book Building, IPOs are usually marketed at a fixed
price. Here the demand cannot be anticipated by the merchant
banker and only after the issue is over the response is known.
In book building, the demand for the share is known before
the issue closes.The issue may be deferred if the demand is
less.
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