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Icai Book Building

CAPITAL MARKET

The Book Building Mechanism of IPOs
—SIDDHARTHA SANKAR SAHA

To keep pace with the globalisation and liberalization process, the government of India was very keen to bring the capital market in line with international practices through gradual deregulation of the economy. It led to liberalisation of capital market in the country with more expectations from primary market to meet the growing needs for funds for investment in trade and industry. Therefore, there was a vital need to strengthen the capital market which, it felt, could only be achieved through structural modifications, introducing new mechanism and instruments, and by taking steps for safeguarding the interest of the investors through more disclosures and transparency. As such, an important mechanism named as Book building in the system of initial public offerings (IPOs) was recognised by SEBI in India after having the recommendations of the committee under the chairmanship of Y. H. Malegam in October, 1995. SEBI guidelines recognised book building as an alternative mechanism of pricing. Under this approach, a portion of the issue is reserved for institutional and corporate investors.

EBI guidelines, 1995 defines book building as “a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document.” Book building process is a common practice used in most developed countries for marketing a public offer of equity shares of a company. However, book building is a transparent and flexible price discovery method of initial public offerings (IPOs) in which price of securities is fixed by the issuer company along with the Book Running Lead Manager (BRLM) on the basis of feedback received from investors as well as market...