Question

The pricing process in equity offering is a difficult job. Explain how this difficult job is performed under open price book building mechanism.

Answer 1

Book building is a mechanism where pricing of securities for the first time in Initial Public Offering. The share prices are determined on the basis of real demand for the shares in the market. It is based on the various price levels in the market. When the company is not sure about the exact price at which the company sells its shares, it will decide a price range instead of an exact figure. Thus wide range of prices is offered for the investors and will ask them to bid on. This process is called book building. This is treated as an alternative to firm allotment.

Book building process

• Appointment of investment banker : The first step is appointing investment banker. It conducts due diligence, and fixes the size of the capital issue.
• Collecting bid : Investors are asked to bid to buy shares
• Price discovery : Bids are aggregated by investment banker and price will be fixed by using weighted average method. The price will be declared as cut off price
• Publicizing : Companies will publicize the bids received by them in this stage.
• Settlement : In this process application amount will be collected by the company fro bidders and the shares will be allotted to them.