Book building
Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
Book building is a way of setting the price of shares in an IPO. The company announces a price band, and investors bid for shares at prices within that band. The final issue price is fixed according to demand. It helps the market discover a fair price instead of the company guessing one. The top of the band can be at most 120% of the bottom. Retail investors may bid at the cut-off price, meaning they accept whatever final price is set.
Example
A company sets a price band of Rs 100-120 (Rs 120 is 120% of Rs 100). Strong demand near the top of the band leads to a final price of Rs 120. In a book-built issue, QIBs get up to 50% of the shares, non-institutional investors at least 15%, and retail investors at least 35%.
Don't confuse with
- Fixed-price issue: the price is set in advance, and investors simply apply at that price. There is no bidding.
Related concepts
- Primary market
- Initial Public Offering
- Red herring prospectus
- Anchor investor
- Qualified Institutional Buyer
- Application Supported by Blocked Amount
- Green shoe option
- Underwriting
- Grey market premium
- Follow-on Public Offer