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What is Book Building?
Companies raise capital for their expansion and modernization requirements thru capital issues in the Primary Market. When an unlisted company hits the market with its issue, it is known as an Initial Public Offering or IPO. When a listed company enters the primary market to mobilize capital, it is called a Follow on Public Offering or FPO. These IPOs or FPOs could take either Fixed Price route or the Book Building route.
How a Book Building Issue differs from a Fixed Price Issue
Fixed Price Issue
• Offer price of the shares is announced in advance.
• Demand for the shares is known only after the closure of the issue.
• Payment for the shares applied for should be paid in advance.
• 50% of the issue is reserved for applications below Rs 1 lakh, and balance for higher amount applications.
• Applications should be submitted thru a bank or authorized agents of the issue. Online application is not possible
Book Building Issue
• Actual issue price is not known in advance. Only a 20% price band will be set by the issuer. Investors will submit bids within this range. Actual issue price will be known only after the closure of the issue.
• Demand for the issue at various price levels will be known on a real time basis during the book building process. These details will be available on the websites of the Stock Exchanges.
• Qualified Institutional Buyers need to pay only10% of the amount applied for. Others need to pay 100% payment at the time of the application.
• 50% of the issue is reserved for QIBs, 35% for small investors, and the rest for other investors.
• Online subscription is possible in a Book Building issue.
The Book Building process is done as per Rules governing Book building covered in Chapter XI of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000. In India, both BSE and NSE offer software-based Book Building, and this can be done online thru the respective websites or thru authorized brokers or agents to the issue.