What Is the Book Building Process? Definition, Steps & Example

Any company that is willing to grow and establish a good base in the market usually plans to go public. The idea is to sell the shares of the company to the general public to raise funds, which can be used for the operations and growth. This is what we call the IPO, or the Initial Public Offering. 

But the critical question here is how the price of shares is defined. This is where you need to understand the concept of the book-building process. This is a process that allows you to find the right price for your shares without either defaulting or inflating it.

While this might sound simple, it is one of the most complex processes that every company follows when it goes public. So, let us understand what the book-building process is and why it is important.

What Is the Book Building Process?

The book building process is a price discovery mechanism used mainly in IPOs. In this process, a company does not decide a single share price in advance. But in place of this, the company will announce a band. It will invite the investors to bid within this range for the shares. These bids indicate how many shares investors are willing to buy and at what price.

All bids are collected and analyzed together. The price at which the issue receives enough demand becomes the final issue price. This method reflects actual market demand and helps avoid incorrect pricing.

For ease of understanding, what is the book-building process with an example? Read this.

Example

Suppose a company plans an IPO of 50 lakh shares and announces a price band of Rs. 80 to Rs. 100 per share. Investors place bids during the issue period at different prices. Now, say that the following are the brief details of the bids issued:

• At Rs. 100, bids come for 15 lakh shares.

• At Rs. 90, bids come for 35 lakh shares.

• At Rs. 80, bids come for 60 lakh shares.

Since the issue gets fully subscribed at Rs. 80, this becomes the cut-off price. Shares are allotted based on this price. So, all the investors who have placed their bid at or above the mentioned price will receive the allotment. But again, this will be based on the application approved and shares available, or else, the company might go for pro-rata or draw basis.

Features of the Book Building Process

Now that you know the meaning of the book building process in IPO, it is important to understand the key features that help it to stand out. So, here are the top ones that you must know:

• Share price is determined based on investor demand.

• Bidding is done only from the price band shared by the company.

• Retail investors can choose the cut-off price option.

• It reduces the risk of overpricing or underpricing shares.

• The process is regulated by SEBI for transparency and fairness.

• Retain investors' IPO allotment will be based on the price set at the end.

Pros and Cons of the Book Building Process

The process of book building is one with various clear advantages. But at the same time, there are certain flaws as well that you must know. 

Pros of the Book Building Process

• Helps in fair price discovery based on real demand.

• Reduces the chances of overpricing or underpricing shares.

• Offers transparency in the IPO pricing process.

• Allows retail investors to bid at the cut-off price.

• Actual market demand for shares can be known.

Cons of the Book Building Process

• Not a good option for beginners. 

• Final price is known only after allotment or closure of IPO.

• Price can be influenced by institutional demand.

• Limited control over the final price.

How the Book Building Process Is Done

The book-building process follows a clear set of steps. This helps companies discover a fair IPO price. Each stage focuses on collecting investor demand. At the end, all the data is used to finalize the issue price transparently.

Step 1: Appointment of Lead Managers

The company appoints book-running lead managers who handle pricing, bidding, and overall issue management.

Step 2: Announcement of Price Band

A price range is declared within which investors can place their bids.

Step 3: Opening of the IPO Issue

The IPO opens for subscription, allowing investors to submit bids during the issue period.

Step 4: Investor Bidding

Interested investors will now bid on the share. They will select the price from the band. They can also set a cut-off price.

Step 5: Book Formation

Once the IPO closes, all bids are collected. These are then analyzed to come to a decision. This helps set the price of the share.

Step 6: Final Price Discovery

Once the final price is set, the cut-off is determined. This acts as the benchmark. Based on this, the entire issue is allotted.

Step 7: Allotment and Refund

Shares are allotted to eligible investors, and excess funds are refunded.

Is There a Reverse Book Building Process?

Yes, there is a reverse book building process, and it is mainly used during company delisting. Unlike an IPO, where investors bid to buy shares, here investors quote the price. This is the price at which they are willing to sell their shares. This process helps to reach a fair price in the market. This is done as follows:

• The company announces its plan to delist from the stock exchange.

• A floor price is fixed as per SEBI guidelines.

• Shareholders submit bids stating the price at which they want to sell.

• Bids are collected and arranged from lowest to highest price.

• The final exit price is decided.

• Shareholders who bid at or below this price can exit at the final price.

Conclusion

The book-building process makes IPO pricing more realistic. This is because it links the price to the actual investor demand. It also offers a fair exit route through reverse book building during delisting. If you plan to apply for IPOs or track listings closely, consider Rupeezy. Get access to expert insights and the support you need to invest better.

FAQs

How long does the book-building process take?

The bidding period usually lasts three to five working days, followed by price finalization and allotment.

Can investors change or cancel bids during book building?

Yes, bids can be modified or withdrawn at any time before the issue closes.

What happens if an IPO is oversubscribed in book building?

Shares are allotted as per SEBI rules, and excess application money is refunded.

Does book building affect listing day performance?

It helps in fair pricing. But the listing gains or losses still depend on market conditions.

Where can investors check book-building demand data?

Demand details are published on stock exchange websites during the IPO period.