How does the book building process work in an IPO?

The book building process in the IPO is an essential concept for investors looking to understand how the price of new shares is determined and how bids are allocated. Book building is a widely used method for pricing IPOs, especially in markets where companies want to gauge investor demand before finalising the issue price.

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The process begins with the company appointing lead managers or underwriters who coordinate the IPO. A draft prospectus is published, outlining the company’s financials, business plan, and intended use of funds. Importantly, a price band is set, a minimum and maximum price at which investors can place bids.

Investors, typically institutional and retail alike, then submit bids within this price band. The steps involved in IPO book-building involve collecting these bids over the subscription period. Institutional investors may submit large bids, while retail investors contribute smaller, individual bids. The underwriters record all these bids in the “book,” which is essentially a detailed record of demand at various price levels.

Once the bidding period closes, the underwriters analyse the book to understand investor interest at different price points. The how IPO price is discovered through bookbuilding steps involves evaluating demand against the number of shares on offer. If demand is high at the upper end of the price band, the final issue price is often set closer to that level. Conversely, if demand is slightly lower, the price may be set lower to encourage participation.
Book building also determines the allocation of shares. Oversubscribed IPOs may use a lottery or proportional allotment system to distribute shares fairly among retail investors, while institutional investors often receive their full bids or adjusted quantities based on demand.

For investors, understanding book building is valuable because it signals market sentiment. High demand during the process may indicate strong confidence in the company, potentially leading to listing gains. Conversely, lower than expected demand can suggest caution.

In summary, book building in an IPO is a transparent and structured mechanism to discover the optimal price for shares. By collecting bids, analysing demand, and finalising the price accordingly, it ensures fair pricing for both the company and investors while providing insights into market appetite.