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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
|
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.
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