Indian stock markets have risen multi-fold in 2017 with the key equity indices rising about 28%. There were many shares from small-cap to large-cap categories which have beaten these stellar returns. The domestic stock market rally wasn’t limited to secondary markets but the primary market where companies issue shares for the first time through IPO (initial public offerings) also received a heavy response. There were about seven IPOs which got subscribed over 100 times and a few ones which got a bumper debut on stock exchanges. Last year there were some of the biggest IPOs in the history of Indian capital markets, namely from ICICI Lombard’s Rs 5,700 crore issue to GIC’s Rs 11,370 crore public offer. Even 2018 will see some of the biggest IPOs hitting the market.
Initial Public Offerings (IPOs) have always played the favorite kid of the bourses when it comes at raising money from the markets. This itself speaks volume about the state of the existing market. However, coming back to the topic, what exactly determines the book building process, which decides the final price for the IPO to be launched. To put it as a one liner, it’s the issuer of the offering who finds out about the highest price at which the IPO can be sold through bids placed by investors in the open market.
Price Discovery Mechanism
Explaining it in form of an example let’s consider a company that is planning to come out with an IPO. The company decides to offer 3,000 shares at a price band of Rs 24-28. And, once the news hits the market, interested investors come up with 5 bids. You would be interested in selling your shares at the highest bid price of Rs 500. But, the problem is that for the same price only 500 shares can be sold. Then you come down to Rs 27 price for which you can sell 1500 shares in cumulative quantity. But subscription is not 100% subscribed here and you then come lower down to 26 for which you have received 1500 bids (3000 in cumulative quantity) and hence, 100% subscribed. The people with bids are interested in buying IPO stock at 26 or higher. The cut-off price is fixed at Rs 26 and all bids above the price are considered as legal bids. The IPO will be priced at Rs 26 or lower than this but not at higher price as not adequate number of bids was received so as to make the offer fully subscribed.
How is Book Building different from Reverse Book Building Process?
Book Building Process is used to raise required funds; Reverse Book Building is the way of buying back shares from the market. Under Reverse Book Building Process, the offers are accepted from the existing investors (holding shares) and on the last day (closing day) the final price is determined. It’s generally observed that the price calculated by the method is usually higher than the market price.
Equity issuance in India this year will outdo 2017’s record as a slew of companies take advantage of a booming stock market to raise growth capital, according to a top arranger of share sales in the nation. First-time share sales have raised more than 762 billion rupees ($11.9 billion), boosting total issuance to 1.95 trillion rupees, thanks to the rally that’s made Indian equities one of Asia’s best performers this year. The fundraising rush isn’t showing signs of cooling, with three of the nation’s biggest companies — Housing Development Finance Corp., HDFC Bank Ltd. and Tata Steel Ltd. — announcing plans last to raise as much as 413 billion rupees.