Book building is a process used in capital markets for price discovery and efficient allocation of securities during an initial public offering (IPO) or other securities issuance. The Companies Act of 2013 in India, along with the Securities and Exchange Board of India (SEBI) regulations, governs the procedure of book building. Let’s elaborate on the concept of book building in reference to the Companies Act 2013:
1. Definition and Authorization (Section 26 – Companies Act 2013):
- Definition: The Companies Act 2013 authorizes the issue of securities to the public through the process of book building. Book building is a mechanism for determining the IPO price by allowing investors to bid for the shares within a price range specified by the issuer.
- SEBI Regulations: SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 provides detailed guidelines on book building.
2. Book Building Process:
- Price Discovery: The process involves the collection of investor demand for the securities being offered. Investors bid for the shares within a price range specified by the issuer. The final issue price is determined based on the demand generated at various price levels.
- Price Range: The issuer, with the help of lead managers, determines a price range within which investors can bid. This range is disclosed in the offer document, and investors place bids for the shares at specific prices within this range.
- Bidding Period: The book building process typically has a specific bidding period during which investors can submit their bids. The bidding process allows for flexibility in determining the final issue price.
3. Role of SEBI (SEBI ICDR Regulations, 2018):
- Regulatory Oversight: SEBI plays a crucial role in regulating and overseeing the book building process. The SEBI (ICDR) Regulations provide guidelines for book building, ensuring transparency and investor protection.
- Disclosure Requirements: The issuer is required to disclose information about the book building process in the offer document, including the price range, the minimum bid quantity, and other relevant details.
4. Institutional and Retail Participation:
- Institutional Book Building: Institutional investors, including qualified institutional buyers (QIBs), participate in the book building process by submitting bids for large quantities of shares.
- Retail Book Building: A portion of the issue is reserved for retail investors. They can participate in the book building process by submitting bids for smaller quantities of shares within the specified price range.
5. Price Allocation and Allotment:
- Finalization of Price: After the bidding period, the final issue price is determined based on the demand at different price levels. The offer price is then finalized, and the securities are allotted.
- Allotment: Allotment is done based on the price at which bids are placed. Investors who bid at or above the final issue price are allotted shares.
6. Benefits of Book Building:
- Efficient Price Discovery: Book building allows for efficient price discovery by capturing investor demand at various price levels.
- Optimal Allocation: The process helps in allocating securities optimally based on investor demand.
- Flexibility: The issuer has flexibility in determining the final issue price, promoting market-driven pricing.
7. Disclosure and Compliance:
- Offer Document: The offer document must provide detailed information about the book building process, including the price range, bidding period, and other relevant details.
- SEBI Compliance: The book building process must comply with SEBI regulations, ensuring transparency, fairness, and investor protection.
The book building process, as per the Companies Act of 2013 and SEBI regulations, enhances the efficiency of capital raising activities by allowing market forces to determine the price of securities. It provides a dynamic and transparent mechanism for price discovery during public offerings.
