About book building for IPOs.

Byline: Arnav Pandya / ETIG

The most important question facing investors in any public issue is deciding as to whether the issue price is higher or lower than market expectations. Even though the primary market has been sluggish for a while it is time to revisit the concept of book building which has become popular in recent times.

Book building is a process which is used by companies to launch an issue. There is a lot of difference between the way a book building issue works to what investors have been traditionally accustomed to, which is investing through fixed price issues in initial public offerings.

In the fixed price case, a price is decided upon for the issue and this is the (fixed) price at which investors could put in their applications. This means that the price is known upfront and hence investors can take a decision as to whether they want to put in their money or not.

There have been many complaints against this kind of pricing as in many cases the high premium charged at the time of the issue could not be sustained when it came to listing of the stock and consequent trading on the secondary markets.

Under book building, bids are collected from interested investors about the price and the quantity that they are willing to buy. Thus the price of the issue is not fixed upfront. Instead the price is determined through the book building route.

There are a few related terms here, which an investor will come across and hence needs to know about. Depending upon specific issues in the market a few or all of these terms might come into the picture. The first term is that of the floor price. This floor price is the indicative minimum bid price per share.