Types of Issues: Fixed Price & Bookbuilding

There are two types of issues

Fixed Price Issues
An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. The Issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the Draft offer documents filed with SEBI and actual price can be determined at a later date before filing of the final offer document with SEBI/ROCs.

Price Discovery through Bookbuilding Process
“Book Building” means a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer. This method provides an opportunity to the market to discover the price for securities.

The process is named so because it refers to collection of bids from investors, which is based on a price range. The issue price is fixed after the closing date of the bid.

A company planning an IPO/FPO appoints a merchant bank as a book runner. A particular time frame is fixed as the bidding period. The book runner then builds an order book that collates bids from various investors. Potential investors are allowed to revise their bids at any time during the bidding period. At the end of bidding period the order book is closed and consequently the quantum of shares ordered and the respective prices offered are known. The determination of final price is based on demand at various prices.

Bookbuilding has become the preferred route of raising capital, as can be seen from the table below. Though there are fixed price issues, by amount, the bookbuilding IPO/FPOs dominate.

YEAR	BOOKBUILDING			FIXED PRICE			TOTAL
	NO.OF IPOs	AMOUNT (Rs.crore)	%	NO.OF IPOs	AMOUNT (Rs.crore)	%	NO.OF IPOs	AMOUNT (Rs.crore)
2003-04	9	2641.04	82.8	10	550.07	17.2	19	3191.10
2004-05	15	14507.04	98.9	8	155.28	1.1	23	14662.32
2005-06	53	10225.43	94.7	23	572.45	5.3	76	10797.88
2006-07	65	23469.07	99.0	11	237.10	1.0	76	23706.16
2007-08	74	41068.98	99.4	10	254.47	0.6	84	41323.45
2008-09	17	1959.92	96.4	4	74.07	3.6	21	2033.99
2009-10	39	24948.13	100.0	0	0.00	0.0	39	24948.13
2010-11 (till 30 June 2010)	9	4303.36	100.0	0	0.00	0.0	9	4303.36

SOURCE : PRIME Database

Open Bookbuilding
In book-built issues, it is mandatory to have an online display of the demand and bids during the bidding period. This is known as open book system. (Under closed book building, the book is not made public and the bidders have to take a call on the price at which they intend to make a bid without having any information on the bids submitted by other bidders). As per SEBI, only electronic facility is allowed to be used in case of book building.

Price Band
The offer document may have a floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band can not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The company decides the price band in consultation with the investment bankers, and typically after undertaking a pre-marketing exercise with some leading QIBs.

The price band can have a revision. SEBI requires that any revision in the price band has to be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members. When the price band is revised, the bidding period has to be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.

Floor Price
Floor price is the minimum price at which bids can be made.

Cut-off Price
In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut off price”. This is decided by the issuer and LM after considering the book and investors’ appetite for the stock. SEBI ICDR Regulations 2009 permit only retail individual investors to have an option of applying at cut off price.

Final Issue Price
The demand at various price levels within the price band is made available on the websites of the designated stock exchanges during the entire tenure of the issue and once the issue closes, the final price is determined by the issuer and made known to the investors.

Minimum Number of Days for which an IPO/FPO Subscription List has to remain Open
In the case of fixed price issues, subscription list for public issues has to remain open for at least 3 working days and not more than 10 working days.

In case of bookbuilding issues, the minimum and maximum period for which bidding has to remain open is 3 – 7 working days extendable by 3 days in case of a revision in the price band.

The public issue made by an infrastructure company, satisfying the requirements in Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21 working days.
 
Pure Auction as an Additional Bookbuilding Mechanism
SEBI has decided to introduce an additional method of book building, to start with, for FPOs, in which the issuer would decide on a floor price and may mention the floor price in the red herring prospectus. If the floor price is not mentioned in the red herring prospectus, the issuer shall announce the floor price at least one working day before opening of the bid in all the newspapers in which the pre-issue advertisement was released. 

Qualified institutional buyers shall bid at any price above the floor price. The bidder who bids at the highest price shall be allotted the number of securities that he has bided for and then the bidder who has bided at the second highest price and so on, until all the specified securities on offer are exhausted. Allotment shall be done on price priority basis for qualified institutional buyers. Allotment to retail individual investors, non-institutional investors and employees of the issuer shall be made proportionately. Where, however the number of specified securities bided for at a price is more than available quantity, then allotment shall be done on proportionate basis. Retail individual investors, non-institutional investors and employees shall be allotted specified securities at the floor price subject to provisions of Clause (d) of Regulation 29 of SEBI ICDR Regulations 2009. The issuer may:-
(a) Place a cap either in terms of number of specified securities or percentage of issued capital of the issuer that may be allotted to a single bidder;
(b) decide whether a bidder be allowed to revise the bid upwards or downwards in terms of price and/or quantity;
(c) decide whether a bidder be allowed single or multiple bids.

Fast Track Issues 
In order to enable well established and compliant listed companies to access Indian primary market in a time effective manner through follow-on public offerings and rights issues, SEBI introduced the concept of Fast Track Issues (FTIs) in November 2007. SEBI has relaxed certain requirements of FTIs such as reducing the average market capitalization of public shareholding of the issuer to Rs. 5000 crore from Rs. 10000 crore, pegging the annualized trading turnover to free float for companies whose public shareholding is less than 15% of the issued capital. In case the clause relating to composition of Board of Directors has not been complied with in one or more quarters, it need not be deemed as non compliance, provided the company is in compliance in this regard at the time of filing the offer document with stock exchange/ ROC and adequate disclosures are made in the offer document in this respect.