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What is book building
Companies have different ways and options to raise funds. While an unlisted company can come out with an initial public offer (IPO), a listed firm can raise through follow on public offer (FPO) or right issue. IPOs or FPOs can be issued either at a fixed price or a range can be given to investors to choose a price. The methodology of issuing securities by giving a price range is known as book building method. A book building is a price discovery mechanism. Under this methodology, issuers donít fix up a single price for the securities but provide a price range.
What is the difference between book building issue and fixed price issue?
The major difference between the both is that in a book building the issue price is not given in the beginning but the bids are made in a range and depending upon the demand and supply the issue price is decided, whereas in a fixed price issue the price is decided in the beginning and investors buy the shares at that price. While demand is known in the book building issue on a daily basis, in fixed price issues it is only known in the end.
How is it different from reverse book building?
Book building is used to raise funds while reverse book building is used for buying shares back from the market. Itís again an efficient price discovery mechanism, under which the offers are accepted from existing investors and on the closing day the final price is determined. Usually the price determined in reverse book building is higher than the market price.
What is the process for book building?
The whole process starts with the nomination of the lead manager, an investment banker who helps in taking the issue to the market by the fund raising company. The lead manager and the issuing company decide the price band and the size of the issue. Syndicate members are appointed to receive orders from investors. Generally the issue remains open for five days. During the subscription period, investors make their bidding within the decided price range. After the closing of book building period, the lead manager and issuing company determine the issue price at which all the securities can be sold. Finally the securities are allotted to investors.
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Investors put their bid within the price range and depending on the demand supply of the units, the final price is decided. The lowest price of the range is called the floor price and the highest price is called as cap price. Cut off price is the price at which the shares are allotted.