What is the process of Book Building and Price Discovery?

Book Building is a method of pricing the shares in the market. There are usually two types of share pricing methods −

  • The Fixed Priced Method −The price of shares when issued remains constant and fixed. The price is usually mentioned before the IPO and the investors are aware of the fixed price of each share.

  • The Book Building Method − There is no fixed price. Instead, there are limits (a lowest and the highest price) in which the shares are traded. When the IPO takes place, the issuers of the securities adjust the price depending on the demand of the shares in the market. This process of finding the right price for the shares is called price discovery.

The Book Building process is the most common process of issuing a share. Although it is considered disadvantageous for the shareholders, most of the share pricing is now done via the book-building process. In case of book building, the company mentions the floor price but not the ceiling price. The ceiling price is determined depending on the demand of the share in the market during the IPO process.

Steps in the Book Building Process

The Book Building process usually has the following steps −

  • The first step is to plan an IPO. This is usually done via a book-building route. The company analyzes the market conditions and fixes the schedule as well as the pricing of the shares.

  • The second step is to appoint an issue manager as the book runner. The book runner is usually a merchant banker that manages the IPO from start to end.

  • The draft prospectus is issued by the company. It contains all the information regarding the IPO process. This prospectus contains the price and operation information and it must be distributed to the potential shareholders before the issue of shares.

  • The draft prospectus is then shared with SEBI. SEBI is the controller of the share markets in India. It is known as the Security Exchange Board of India.

  • The book runner appoints the intermediaries and other institutions that help in the subscription after the approval obtained from SEBI. It is an important step because the share distribution process is done by the intermediaries and so they must have a strong base of investors.

  • The next step is price discovery via the bidding process. As the share is listed in the market, investors start bidding on the share. High demand increases the price, while less demand brings the price down.

  • When the bidding is over, the company and the book runner decide allotments and allocation.

Nowadays, the book-building process is done completely electronically.