Book built issue
Also written Book building issue · Book-built offer
A public issue in which the price is discovered from investor bids inside a price band, rather than fixed by the issuer in advance, with allotment made at the cut-off price.
In plain language
There are two ways to price a public issue. In a fixed price issue the company announces the price before the issue opens and justifies it by its expected performance and the prices of comparable listed companies. Investors take it or leave it.
In a book built issue the company declines to name a price. It publishes a range, investors bid inside it, and the price emerges from the demand that comes in. The objective, in the workbook's words, is to identify the price that the market is willing to pay for the securities being issued.
The "book" is simply the running tally of bids: how many shares investors want, at each price.
How it works
The band. The company and its issue managers specify either a floor price (base price) or a price band — a range starting at the floor price and running to 20% above it. A floor of Rs 120 therefore supports a cap of Rs 144 and no higher.
The bids. When the issue opens, investors put in bid applications specifying the price and the number of securities, or the total amount, bid at that price. The bid price must be above the floor price, or within the band where one is given. Retail investors can revise their bids during the period the issue is open.
The cut-off price. The issuer, in consultation with the book running lead manager, decides the cut-off price — the price at which the issue gets subscribed. All bidders at or above that price are successful and are eligible for allotment in their respective categories.
The retail discount. A book built issue may allow allotment to retail investors at a discount to the cut-off price. That discount is capped: the retail price cannot be lower by more than ten per cent of the price at which shares are allotted to the other categories.
Reservations for categories such as qualified institutional buyers and mutual funds are made during the issue, under the SEBI (Issue of Capital and Disclosure Requirements) Regulations.
A worked example
The workbook's own book. A company offers 5,000 shares in a band of Rs 120 to Rs 144 — note that 144 is exactly 120 x 1.20, the maximum width the rule allows.
| Bid price | Shares bid | Cumulative demand |
|---|---|---|
| Rs 144 | 1,000 (A) | 1,000 |
| Rs 140 | 1,500 (B) | 2,500 |
| Rs 135 | 2,500 (C) | 5,000 |
| Rs 130 | 1,000 (D) | 6,000 |
| Rs 120 | 500 (E) | 6,500 |
Read down the cumulative column until it first reaches the offer size. It does so at Rs 135, where demand is exactly 5,000 shares. Rs 135 is the cut-off price.
Bidders at Rs 144, Rs 140 and Rs 135 are successful. Bidders at Rs 130 and Rs 120 get nothing — their money is returned.
What the issuer raised: 5,000 x Rs 135 = Rs 6,75,000. Had the same company run a fixed price issue at Rs 120, it would have raised Rs 6,00,000 and left Rs 75,000 on the table. Price discovery is worth something.
The retail discount, applied. If the issuer offers retail investors the maximum permitted discount:
Floor for retail = 135 - (10% of 135) = 135 - 13.50 = Rs 121.50
A retail allottee of 100 shares pays Rs 12,150 instead of Rs 13,500 — a saving of Rs 1,350 — and the issuer may not price the retail tranche below that.
Why NISM asks about it
Chapter 6 (Securities Market Segments), under the types of public issue, where the fixed price issue and the book built issue are set against each other. This is one of the most reliably examined tables in the paper: given a bid book, find the cut-off price; state the maximum width of a price band; say who may revise bids and when; and state the cap on the retail discount.
Common exam traps
- The cut-off price is where cumulative demand first covers the issue, not the highest bid. Rs 144 attracted bids; it is not the price.
- The band is floor to floor + 20%, not any range the issuer likes. A band of Rs 120-160 is not permissible on a Rs 120 floor.
- Bidders below the cut-off get nothing. Partial allotment at their own bid price is not how a book built issue works.
- Retail investors may revise bids; the discount is a separate concession. Do not fuse the two into one rule.
- The retail discount is capped at 10% of the price allotted to other categories — ten per cent of the cut-off, not ten per cent off the floor.
- Cut-off price and "bidding at cut-off" are different ideas. The cut-off price is the discovered price; a retail investor "bidding at cut-off" is agreeing in advance to accept whatever that turns out to be.
- Reverse book building is the mirror image, used for delisting — the company buys shares back rather than selling them. Do not confuse the two.
Check yourself
1.In a book built issue, a price band may extend up to what level above the floor price?
- a)10 per cent
- b)15 per cent
- c)20 per cent
- d)25 per cent
Show the answer
Answer: (c) 20 per cent
"The company and its issue managers will specify either a FLOOR PRICE (base price) or a PRICE BAND (price range starting from floor price to 20% ABOVE IT) within which investors can bid." In the chapter example the band of Rs 120 to Rs 144 is exactly 20 per cent wide, since 120 x 1.20 = 144.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Cut-off priceIn a book-built issue, the price at which the issue is fully subscribed. Everyone who bid at or above it succeeds and is allotted at that price.
- Initial Public OfferThe first offer of a company's shares to the public — by fresh issue, by existing shareholders selling through an offer for sale, or both — after which the shares must be listed.
- Price bandThe highest and lowest price at which a contract may trade on a given day, set as a percentage of its base price to block erroneous and manipulative orders.
- Hard underwritingAn underwriter's commitment to buy an IPO's unsold shares, given at the initial filing stage before the issue price is even fixed — the firmer and earlier of the primary market's two underwriting commitments.
- Bidding at the cut-offIn a book-built public issue, choosing to bid at whatever price the book-building process finally settles on, rather than naming a specific price, which guarantees the bid is never rejected for being priced too low.
- Dilution of holdingsThe fall in an existing shareholder's proportionate ownership of a company that happens whenever it issues fresh shares to anyone other than that shareholder, in the same proportion.
- Primary marketThe market where an issuer sells securities to investors for the first time and receives the money itself — the "new issue market", as against the secondary market where investors trade among themselves.
- Fixed price issueA public issue in which the company, with its lead manager, sets the issue price in advance and discloses it, so investors know exactly what they will pay when they apply — the alternative to a book built issue.
- Basis of allotmentThe process of deciding how many shares each applicant in a public issue gets — all they applied for if the issue is not oversubscribed, otherwise a proportion worked out separately for each investor category.
- UnderwriterAn institution that agrees, under an underwriting agreement, to subscribe to the part of a public issue that investors do not take up — and is paid a commission for standing behind the issue.