BOOK BUILDING

INTRODUCTION

Every business organization needs funds for its business activities. It can raise funds either externally or through internal sources. When the companies want to go for the external sources, they use various means for the same. Two of the most popular means to raise money are Initial Public Offer (IPO) and Follow on Public Offer (FPO).

During the IPO or FPO, the company offers its shares to the public either at fixed price or offers a price range, so that the investors can decide on the right price. The method of offering shares by providing a price range is called book building method. This method provides an opportunity to the market to discover price for the securities which are on offer.

CONTD..

Book Building may be defined as a process used by companies

raising capital through Public Offerings-both Initial Public Offers

(IPOs) and Follow-on Public Offers (FPOs) to aid price and demand

discovery. It is a mechanism where, during the period for which the

book for the offer is open, the bids are collected from investors at

various prices, which are within the price band specified by the

issuer. The process is directed towards both the institutional

investors as well as the retail investors. The issue price is

determined after the bid closure based on the demand generated in

the process.

CONTD..

Book Building vs. Reverse Book Building:

While book building is used to raise capital for the company’s business operations, reverse book building is used for buyback of shares from the market. Reverse book building is also a price discovery method, in which the bids are taken from the current investors and the final price is decided on the last day of the offer. Normally the price fixed in reverse book building exceeds the market price.

CONTD..

Book Building vs. Fixed Price Method: The main difference between the book building method and the

fixed price method is that in the former, the issue price to not decided initially. The investors have to bid for the shares within the price range given. The issue price is fixed on the basis of demand and supply of the shares.

On the other hand, in the fixed price method, the price is decided right at the start. Investors cannot choose the price. They have to buy the shares at the price decided by the company. In the book building method, the demand is known every day during the offer period, but in fixed price method, the demand is known only after the issue closes.

HOW IS THE PRICE FIXED?

All the applications received till the last dates are analyzed and a final offer price, known as the cut off price is arrived at. The final price is the equilibrium price or the highest price at which all the shares on offer can be sold smoothly. If the price quoted by an investor is less than the final price, he will not get allotment.

If price quoted by an investor is higher than the final price, the amount in excess of the final price is refunded if he gets allotment. If the allotment is not made, full money is refunded within 15 days after the final allotment is made. If the investor does not get money or allotment in a month’s time, he can demand interest at 15 per cent per annum on the money due.

EXAMPLE

In this method, the company doesn’t fix up a particular price for the shares, but instead gives a price range, e.g., Rs. 80 to 100. When bidding for the shares, investors have to decide at which price they would like to bid for the shares, e.g., Rs. 80, Rs. 90 or Rs. 100. They can bid for the shares at any price within this range. Based on the demand and supply of the shares, the final price is fixed.

The lowest price (Rs. 80) is known as the floor price and the highest price (Rs. 100) is known as cap price. The price at which the shares are allotted is known as cut off price. The entire process begins with the selection of the lead manager, an investment banker whose job is to bring the issue to the public.

CONTD..

Both the lead manager and the issuing company fix the price range and the issue size. Next, syndicate members are hired to obtain bids from the investors. Normally, the issue is kept open for 3 days. Once the offer period is over, the lead manager and issuing company fix the price at which the shares are sold to the investors.

If the issue price is less than the cap price, the investors who bid at the cap price will get a refund and those who bid at the floor price will end up paying the additional money. For example, if the cut off in the above example is fixed at Rs. 90, those who bid at Rs. 80, will have to pay Rs. 10 per share and those who bid at Rs. 100, will end up getting the refund of Rs. 10 per share. Once each investor pays the actual issue price, the share are allotted

STEPS IN BOOK BUILDING

The main parties who are directly associated with book building

process are the issuer company, the Book Runner Lead

Manager(BRLM)(i.e. merchant banker) and the syndicate members.

The steps to book building are:

1.The issuer company proposing an IPO appoints a lead merchant banker as a BRLM.

2.Initially, the issuer company consults with the BRLM in drawing up a draft prospectus (i.e. offer document) which does not mention the price of the issue, but includes other details about the size of the Issue, past history of the company, and a price band.

3.The draft prospectus is filed with SEBI .

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4. A definite period is fixed as the bid period and BRLM conducts awareness campaigns like advertisement, road shows etc.

5.The BRLM appoints a syndicate member, a SEBI registered intermediary to underwrite the issues to the extent of “net offer to the public”.

6.The BRLM is entitled to remuneration for conducting the Book Building process.

7.The copy of the draft prospectus may be circulated by the BRLM to the institutional investors as well as to the syndicate members.

8.The syndicate members create demand and ask each investor for the number of shares and the offer price.

9.The BRLM receives the feedback about the investor’s bids through syndicate members.

CONTD..

10.The prospective investors may revise their bids at any time during the bid period.

11.The BRLM on receipts of the feedback from the syndicate members about the bid price and the quantity of shares applied has to build up an order book showing the demand for the shares of the company at various prices.

12.On receipts of the above information, the BRLM and the issuer company determine the issue price. This is known as the market-clearing price.

13.The BRLM then closes the book in consultation with the issuer company and determines the issue size.

ADVANTAGES

Investor participation in price finding mechanism which is based on demand analysis.

Transparency in pricing.

Reflects the investors perception and inherent value of the company.

Shareholders number low.

LIMITATIONS

Book-building does not provide an appropriate price discovery mechanism. This is the main reason why small investors have stayed away from the market.

Book-building is appropriate for mega issues only. In the case of the potential investors, the companies can adjust the attributes of the offer according to the preferences of the potential investors. It may not be possible in big issues since the risk-return preference of the investors can not be estimated easily.

There is a possibility of price rigging on listing as promoters may try to bail out syndicate members.

ISSUE DETAIL

 Issue Open: Oct 27, 2015 - Oct 29, 2015 

 Issue Type: 100% Book Built Issue IPO 

 Issue Size: Equity Shares of Rs. 10 

 Issue Size: Rs. 1,272.20 Crore 

 Face Value: Rs. 10 Per Equity Share 

 Issue Price: Rs. 700 - Rs. 765 Per Equity Share

 Market Lot: 15 Shares 

 Minimum Order Quantity: 15 Shares 

 Listing At: BSE, NSE

INDIGO IPO REGISTRAR

Karvy Computershare Private Limited

  Karvy House, 46, Avenue 4, Street No. 1,

   Banjara Hills, Hyderabad - 500 034

   Andhra Pradesh, India

INDIGO IPO LEAD MANAGERS

 Barclays Securities (India) Private Limited

 Citigroup Global Markets India Private Limited

 J.P. Morgan India Private Limited

 Kotak Mahindra Capital Company Limited

 Morgan Stanley India Company Pvt Ltd

 UBS Securities India Private Limited

INDIGO-ISSUE SUBSCRIPTION DETAIL

Number of Times Issue is Subscribed

As on Date & Time

QIB NII RII Employee Total

Shares Offered / Reserved

8,522,935 5,819,746 13,579,407 2,200,000 24,241,380

Day 1 - Oct 27, 2015 17:00 IST

2.9590 0.0219 0.0526 0.0201 0.8603

Day 2 - Oct 28, 2015 17:00 IST

5.1477 0.0421 0.1847 0.0407 1.5471

Day 3 - Oct 29, 2015 20:30 IST

17.8000 3.5700 0.9200 0.1300 6.1500

INDIGO IPO LISTING DATE

 Listing Date: Tuesday, November 10, 2015

 BSE Script Code: 539448

 NSE Symbol: INDIGO

 Issue Price: Rs. 765.00 Per Equity Share

 Face Value: Rs. 10.00 Per Equity Share

LISTING DAY TRADING INFORMATION

BSE NSEIssue Price: Rs. 765.00 Rs. 765.00

Open: Rs. 856.00 Rs. 855.80

Low: Rs. 848.10 Rs. 849.00

High: Rs. 898.00 Rs. 899.50

Last Trade: Rs. 878.45 Rs. 877.25

Volume: 5,066,114 27,351,793

CURRENT PRICE

INDIGO Stock Quote & Charts Closing Price: 1088.85 

↑1.35 (0.12%) Day Open: 1090 Day High-Low: 1114 – 1065 Previous Close: 1087.5 Total Traded Value: 301426 Updated On: 2015-11-26

REFERENCES

http://www.investopedia.com/

http://www.chittorgarh.com/ipo/indigo_ipo/492/

http://www.nseindia.com/

https://en.wikipedia.org/wiki/Book_building

Thank You