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Wednesday, July 27, 2011

Things investors should know about the Book Building process

IPO (or FPO) are generally available either under Book Building Option or Fixed Band Option, or sometimes combination of these two options.
Fixed Price Band Option
Under this option, offer price and allotment price is same and is known to investors in advance.
If an IPO is available under Fixed Price Band method then investors who have subscribed for the issue shall be allotted shares at that fixed price.
Book Building Option
Under this option, at the most 20% price band is offered by the issuer to investors, and investor can bid for shares within this price band. Issue price is fixed by the issuer after the closure of the issue.
Lower price of the price band is known as Floor Price while upper price is known as Cap Price.
How Book Building process is different from Fixed Price option?
·         In Fixed Price issue, demand for the shares offered is known only after the issue closure while In Book Building process demand for shares is available on both national exchanges (BSE and NSE) on real time basis.
·         In Book Building process, RII (Retail Individual Investors) and NII (Non Institutional Investors) have reservation for at least 35% and 15% of the issue respectively; while In Fixed Price issue, 50% of shares are reserved for retail investors.
Which option is better?
Now a day’s almost every issue is offered under the Book Building process. Book Building process ensures better price discovery of the share, apart from this retail investor gets vital cue of demand for the share under all the 3 categories.
Generally QIB oversubscription gives discerning insight to judge the worthiness of the issue. Investors should take QIB subscription as an indicator only and not as the sole reason for applying the issue.
What is Cut-off price?
This is the one of the biggest advantage available only for retail investors under the Book Building process, where investor can bid the issue at Cut-Off price.
Applying issue at Cut-Off price means that retail investors are ready to buy shares at whatever price discovered under the Book Built process and opting for this option, ensures that investor shall get shares at the discovered price.

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