What does ‘book-building’ mean in the context of a public issue or Initial Public Offer (IPO)? Well, in simple words, it means building a book of numbers of shares that a person is willing to buy or apply for at a certain price.
For example, an investor is willing to buy 1,000 shares at ₹100, another may be willing to buy 5,000 shares at ₹95, somebody else may say they are willing to buy 10,000 shares at ₹90.
The price is determined with assistance of merchant banks.
The price band is essentially established by the company by having a conversation or informal discussions with potential investors over the price at which they would be willing to purchase the shares.
An underwriter may be hired for book-building who creates a book following the bids by the investors. Once the process is done, based on demand, using the weighted average method, the final cut-off rate is decided.
Another method is called the fixed pricing issue under which, the prices are determined in advance by the issuing company.
The book-building issue in India allows companies to have a price band of maximum 20%. That means if a company wants to build a book, it can say that it wants to issue the shares at a price band between ₹100 and ₹120.
Based on this, an investor may apply for 1,000 shares at ₹100, another may apply at ₹105, somebody may apply at ₹102, and some investor may also apply at ₹120.
At the end of the day, the company will see how many shares have been applied for, and at what price. Suppose, if the company wants to issue 10,00,000 shares and it has got a subscription for only 10,00,000, then the final price will be determined based on at what price maximum shares have been applied for.
But instead of 10,00,000, if the issue is oversubscribed with bid for, let's say, 1 crore shares, the company will see at what price it will be able to issue 10,00,000 of shares. Accordingly, it may fix the price anywhere between ₹100 and ₹120.
Based on this, if the company decides, for example, to fix the price at ₹108, all those who applied for the shares at ₹108 and above will become eligible while the rest will be ineligible.