What is book building and how it differs from reverse book building?

Often we must have come across the term book building in financial dailies, magazines or television when companies air the advertisement for their likely IPOs, FPOs or rights issue. The book building is nothing but the price discovery mechanism for the issued shares when a company plans to raise capital. Listed companies raise capital either through follow on public offer (FPO) or right issue but unlisted do so through an Initial Public Offer (IPO). And during the process, shares can be allotted to investors at a fixed price or investors can be provided a price band for making their bids. And based on the demand and supply for the shares in the market, cut-off price or the issue price for the floated shares is determined. This process involving the provision of a price band for the investor class for issuance of securities is referred as book building.

Company Issuing securities and Lead Manager complete book building process

The company raising fund capital to effect the book-building process appoint lead manager and an investment bank for making the issue public. Size of the issue or the maximum capital that will be raised through the issue as well as the price band is determined by the lead manager and the issuing company. Following, based on the bids from the investor for the issued securities as well as the demand-supply market forces for the securities in the market, cut-off price or the price at which the securities would be issued to the public is decided and finally securities are issued to investors. Accordingly, letters of allotment or refund are send across to the investors.

Further, as the bidding for shares of the company in the book building process is done within the provided price band; the lowest price referred as the floor price and the maximum price as the cap price, the demand for the securities is known on a daily basis unlike in case when the securities are issued at a fixed price.

Book-building vs Reverse Book building

Book building seems to be a much known term in contrast to reverse book building. So how the two process are different? While book-building as well as reverse book building process both facilitate price discovery, book-building methodology is adopted when a company plans to raise capital and the other is applied when the company voluntarily engaged in delisting of shares. Similar to the book building process, for buying back the shares, shareholders of the company can make bids a either the floor price or at a higher price. Maximum bids at a particular price then determines the discovered price I.e the price at which the company buys back shares from the public.

SEBI in a move to simplify the delisting process for companies is making plans on examining the complete structure of delisting that includes the number of shares to be bought back from public shareholders and price discovery to effect the delisting process among others.

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