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What Is Price Discovery Through ‘Book Building Process’?

What does the price discovery through book building process mean?

What Is Price Discovery Through ‘Book Building Process’?

Book Building is a process used in IPO(Initial Public Offer).When the IPO is Open the bids are collected from Investors, At various Prices which can be above or equal to Floor price.

The process Involves generating and recording the demand of the investor for shares before arriving at a dispute price.

Book building is the de facto mechanism by which companies price their IPOs and is highly recommended by all the main stock exchanges because it is the most effective thanks to price securities.

The applicants bid for the shares quoting the worth and therefore the quantity that they might wish to bid at. After the bidding process is complete, the cut-off price is received to support the demand for securities.

This Initial Public Offering is often made through the fixed price method, book building method or a mixture of both.

The Types of Public Issue
  • Fixed price issues- Price at which the securities are offered and would be allotted is formed known beforehand to the investors.

  • Book building issues- A 20 to price band is obtainable by the issuer within which investors are allowed to bid and therefore the final price is decided by the issuer only after closure of the bidding.

The Process Comprises of the Subsequent Steps:

The issuing company hires an investment bank to act as an underwriter who is tasked with determining the price range the securities are often sold for and drafting a prospectus to send to the institutional investing community.

Investors within the market are requested to bid to shop for the shares. They are requested to bid the amount of shares that they’re willing to shop for at varying price levels. These bids alongside the appliance money are alleged to be submitted to the investment bankers. It must be noted that it’s not one underwriter who is engaged within the collection of bids. Rather, the lead underwriter can appoint sub-agents to tap into their network especially for receiving the bids from a much bigger group of individuals .

The book is ‘built’ by listing and evaluating the aggregated demand for the difficulty from the submitted bids. The underwriter analyzes the information and uses a weighted average to arrive at the final price for the security, which is termed the cutoff price.

The underwriter has got to , for the sake of transparency, publicize the small print of all the bids that were submitted. Shares are allocated to the accepted bidders. The book runners and the issuers decide the final price at the securities which shall be issued



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