Book building is a price discovery technique applied while offering shares when the company is not pre-specifying a price. Rather, it gives an indicative band or price range, and market demand dictates the price. The technique assists in pricing the shares in an effective manner based on investors’ demand rather than on a pre-conceived value.
Points to Remember:
- Every day, investor demand is monitored during book building while bidding.
- Investors bid in prices they will pay within the range provided.
- A Book Running Lead Manager (BRLM) runs the book and reviews all bids at the end of the book to determine the issue price.
- The ultimate share price is calculated on the basis of demand to create a fair market that is price-driven.
- In India, this process is regulated by SEBI’s Issue of Capital and Disclosure Requirements (ICDR) regulations, ensuring transparency and fairness.
Conclusion
Book building is an age-old technique that is advantageous to both issuers and investors. It assists firms in establishing a fair market price while allowing investors to engage in price discovery. The process increases transparency and efficiency and, thereforehas become the preferred method for initial and follow-on public offerings. By matching share pricing with real demand, book building provides greater capital market stability and investor confidence.
