5544374 book building process

7/29/2019 5544374 Book Building Process

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BookBuildingProcess

MukeshKr.Singh


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IntroductionTokeeppacewiththeglobalizationandliberalizationprocess,thegovernmentofIndiawasverykeentobringthecapitalmarketinlinewithinternationalpracticesthroughgradualderegulationoftheeconomy.Itledtoliberalizationofcapitalmarketinthecountrywithmoreexpectationsfromprimarymarkettomeetthegrowingneedsforfundsforinvestmentintradeandindustry.Therefore,therewasavitalneedtostrengthenthecapitalmarketwhich,itfelt,couldonlybeachievedthroughstructuralmodifications,introducingnewmechanismandinstruments,andbytakingstepsforsafeguardingtheinterestoftheinvestorsthroughmoredisclosuresandtransparency.Assuch,animportantmechanismnamedasBookbuildinginthesystemofinitialpublicofferings(IPOs)wasrecognizedbySEBIinIndiaafterhavingtherecommendationsofthecommitteeunderthechairmanshipofY.H.MalegaminOctober,1995.SEBIguidelinesrecognizedbookbuildingasanalternativemechanismofpricing.Underthisapproach,aportionoftheissueisreservedforinstitutionalandcorporateinvestors.SEBIguidelines,1995definesbookbuildingasaprocessundertakenbywhichademandforthesecuritiesproposedtobeissuedbyabodycorporateiselicitedandbuiltupandthepriceforsuchsecuritiesisassessedforthedeterminationofthequantumofsuchsecuritiestobeissuedbymeansofanotice,circular,advertisement,documentorinformationmemorandaorofferdocument.Bookbuildingprocessisacommonpracticeusedinmostdevelopedcountriesformarketingapublicofferofequitysharesofacompany.However,bookbuildingisatransparentandflexiblepricediscoverymethodofinitialpublicofferings(IPOs)inwhichpriceofsecuritiesisfixedbytheissuercompanyalongwiththeBookRunningLeadManager(BR

LM)onthebasisoffeedbackreceivedfrominvestorsaswellasmarketintermediariesduringacertainperiod.

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NeedofBookBuildingTheabolitionoftheCapitalIssueControlAct,1947hasbroughtaneweraintheprimarycapitalmarketsinIndia.Controlsoverthepricingoftheissues,designingandtenureofthecapitalissueswereabolished.Theissuers,atpresent,arefreetomakethepriceoftheissues.BeforeestablishmentofSEBIin1992,thequalityofdisclosuresintheofferdocumentswasverypoor.SEBIhasalsoformulatedandprescribedstringentdisclosurenormsinconformitytoglobalstandards.Themaindrawbackoffreepricingwastheprocessofpricingofissues.Theissuepricewasdeterminedaround60-70daysbeforetheopeningoftheissueandtheissuerhadnoclearideaaboutthemarketperceptionofthepricedetermined.Thetraditionalfixedpricemethodoftappingindividualinvestorssufferedfromtwodefects:(a)delaysintheIPOprocessand(b)under-pricingofissue.Infixedpricemethod,publicoffersdonothaveanyflexibilityintermsofpriceaswellasnumberofissues.Fromexperienceitcanbestatedthatamajorityofthepublicissuescomingthroughthefixedpricemethodareeitherunder-pricedorover-priced.Individualinvestors(i.e.retailinvestors),assuch,areunabletodistinguishgoodissuesfrombadone.ThisisbecausetheissuerCompanyandthemerchantbankerasleadmanagerdonothavetheexactideaonthefixedpricingofpublicissues.Thusitisrequiredtofindoutanewmechanismforfairpricediscoveryandtohelptheleastinformedinvestors.Thatswhy,BookBuildingmechanism,anewprocessofpricediscovery,hasbeenintroducedtoovercomethislimitationanddetermineissuepriceeffectively.Publicoffersinfixedpricemethodinvolveapreissuecostof2-3%andcarrytheriskoffailureifitdoesnotreceive90%ofthetotalsubscription.InBookBuildingsuchcos

tandriskscanbeavoidedbecausetheissuercompanycanwithdrawfromthemarketifdemandforthesecuritydoesnotexist.

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MalegamPanelsRecommendations:Theintroductionofbook-buildinginIndiain1995wasonaccountoftherecommendationsofanexpertcommitteeappointedbySEBIunderChairmanshipofYHMalegamtoreviewthe(then)existingdisclosurerequirementsinofferdocuments.TwoofthetermsofreferencebeingthebasisofpricingtheissueandwhethersubstantialreductionwaspossibleinthetimetakenforprocessingapplicationsbySEBI.ThecommitteehassubmitteditsreportwithseveralrecommendationsandtheSEBIacceptedthesameinNovember1995.Thebook-buildingrouteshouldbeopentoissuercompanies,subjecttocertaintermsandconditions.Someofthemarepresentedbelow:1.TheoptionshouldbeavailableonlytoissuesexceedingRs.100crore;2.Thebook-buildingissuercompaniescouldeitherreservethesecuritiesforfirmallotmentoravailthemselvesofthebook-buildingprocess;3.DraftprospectustobesubmittedtoSEBIcouldexcludeinformationabouttheofferprice;4.Abookrunnertobenominatedfromamongtheleadmerchantbankers,chargedwithspecificresponsibilitiesandthenameistobesubmittedtotheSEBIsapproval5.Therequirementof25percentofthesecuritiestobeofferedtothepublicwillbecontinued.Therehavebeenseveralamendments/revisionstotheaboveguidelines;thefirstoneinDecember1996madeavailabletheoptionofbook-buildingtoallcorporatebodieswhichwereotherwiseeligibletomakeanissueofcapitaltothepublic,andincaseofundersubscription,thespill-overfromthepublicportioncouldbepermittedtotheplacementareaandvice-versa.In1997,therestrictionofthefacilityto75%oftheissuewasthoughttoseverelyconstrainthebenefitsarisingoutofpriceanddemanddiscovery,andthefacilitywasextendedto100percentoftheissue,availableonlyiftheissueamount

wasRs.100croreandabove,compulsorilyofferinganadditional10percentoftheissuetothepublicthroughprospectus,andreservingatleast15percentoftheissuesizetoindividualinvestorsapplyinguptotentradablelots.Further,auditedfinancialratioshadtobedisclosed,namely,EPS,P/E,averagereturnonnetworthforthelastthreeyearsandnet

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assetvaluebasedonlastyearsbalancesheet.However,therewerenotakersforthe100percentbook-buildingfacility.Basedonsuggestionsmadebyleadingmerchantbankers,thefollowingamendmentsweremadetotheguidelinesin1999:1.Theissuermaybeallowedtodiscloseeithertheissuesizeorthenumberofsecuritiestobeofferedtothepublic;2.Allotmentshouldbeindematmodeonly;and3.Reservationof15percentofissueamountforindividualinvestorsneedtothepublicatafixedprice.Someoftheearliestmegaissuesthroughthebook-buildingroutewerethoseofLarsen&Toubro,ICICI,TISCOandothers.

BookBuildingandFixedPriceOptionintheIPOsAcompanymayraisecapitalintheprimarycapitalmarketthroughinitialpublicoffers(IPOs),rightsissuesandprivateplacement.IPOs,thelargestsourcesoffundsintheprimarycapitalmarket,tothecompanyarebasicallyaninvitationbyacompanytothepublictosubscribetoitssecuritiesofferedthroughprospectus.InfixedpriceprocessinIPOs,allotmentsofsharestoallinvestorsaremadeonproportionatebasis.Institutionalinvestorsnormallyarenotinterestedtoparticipateinfixedpricepublicissuesduetouncertaintyofallotmentandlackofopportunitycost.Ontheother,theyliketoparticipatelargelyinbookbuilttransactionsasinthisprocessthecostsofpublicissueandthetimetakenforthecompletionoftheentireprocessaremuchlesserthanthefixedpriceissues.InBookBuildingthepriceisdeterminedonthebasisofdemandreceivedoratpriceaboveorequaltothefloorpricewhereasinfixedpriceoptionthepriceofissuesisfixedfirstandthenthesecuritiesareofferedtotheinvestors.IncaseofBookBuildingprocessbookisbuiltbyBookRunnerLeadMa

nager(BRLM)toknowtheeverydaydemandwhereasincaseoffixedpriceofpublicissues,thedemandisknownatthecloseoftheissue.

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HowisBookBuiltinIndia?Themainpartieswhoaredirectlyassociatedwithbookbuildingprocessaretheissuercompany,theBookRunnerLeadManager(BRLM)andthesyndicatemembers.TheBookRunnerLeadManager(i.e.merchantbanker)andthesyndicatememberswhoaretheintermediariesarebotheligibletoactasunderwriters.Thestepswhichareusuallyfollowedinthebookbuildingprocesscanbesummarizedbelow:1.TheissuercompanyproposinganIPOappointsaleadmerchantbankerasaBRLM.2.Initially,theissuercompanyconsultswiththeBRLMindrawingupadraftprospectus(i.e.offerdocument)whichdoesnotmentionthepriceoftheissues,butincludesotherdetailsaboutthesizeoftheissue,pasthistoryofthecompany,andapriceband.Thesecuritiesavailabletothepublicareseparatelyidentifiedasnetoffertothepublic.3.ThedraftprospectusisfiledwithSEBIwhichgivesitalegalstanding.4.AdefiniteperiodisfixedasthebidperiodandBRLMconductsawarenesscampaignslikeadvertisement,roadshowsetc.5.TheBRLMappointsasyndicatemember,aSEBIregisteredintermediarytounderwritetheissuestotheextentofnetoffertothepublic.6.TheBRLMisentitledtoremunerationforconductingtheBookBuildingprocess.7.ThecopyofthedraftprospectusmaybecirculatedbytheBRLMtotheinstitutionalinvestorsaswellastothesyndicatemembers.8.Thesyndicatememberscreatedemandandaskeachinvestorforthenumberofsharesandtheofferprice.9.TheBRLMreceivesthefeedbackabouttheinvestorsbidsthroughsyndicatemembers.10.Theprospectiveinvestorsmayrevisetheirbidsatanytimeduringthebidperiod.11.TheBRLMonreceiptsofthefeedbackfromthesyndicatemembersaboutthebidpriceandthequantityofsharesappliedhastobuildupanorderbookshowingthedemandforth

esharesofthecompanyatvariousprices.Thesyndicatemembersmustalsomaintainarecordbookforordersreceivedfrominstitutionalinvestorsforsubscribingtotheissueoutoftheplacementportion.

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12.Onreceiptsoftheaboveinformation,theBRLMandtheissuercompanydeterminetheissueprice.Thisisknownasthemarket-clearingprice.13.TheBRLMthenclosesthebookinconsultationwiththeissuercompanyanddeterminetheissuesizeof(a)placementportionand(b)publicofferportion.14.Oncethefinalpriceisdetermined,theallocationofsecuritiesshouldbemadebytheBRLMbasedonpriorcommitment,investorsquality,priceaggression,earlinessofbidsetc.Thebidofaninstitutionalbidder,evenifhehaspaidfullamountmayberejectedwithoutbeingassignedanyreasonastheBookBuildingportionofinstitutionalinvestorsisleftentirelyatthediscretionoftheissuercompanyandtheBRLM.15.TheFinalprospectusisfiledwiththeregistrarofcompanieswithin2daysofdeterminationofissuepriceandreceiptsofacknowledgementcardfromSEBI.16.Twodifferentaccountsforcollectionofapplicationmoney,onefortheprivateplacementportionandtheotherforthepublicsubscriptionshouldbeopenedbytheissuercompany.17.Theplacementportionisclosedadaybeforetheopeningofthepublicissuethroughfixedpricemethod.TheBRLMisrequiredtohavetheapplicationformsalongwiththeapplicationmoneyfromtheinstitutionalbuyersandtheunderwriterstotheprivateplacementportion.18.Theallotmentfortheprivateplacementportionshallbemadeonthe2nddayfromtheclosureoftheissueandtheprivateplacementportionisreadytobelisted.19.Theallotmentandlistingofissuesunderthepublicportion(i.e.fixedpriceportion)mustbeaspertheexistingstatutoryrequirements.20.Finally,theSEBIhastherighttoinspectsuchrecordsandbookswhicharemaintainedbytheBRLMandotherintermediariesinvolvedintheBookBuildingprocess

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BookBuildingProcess

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StepsinvolvedinBookBuildingProcess:NominateBookRunner

FormSyndicateofBrokers,Arrangers,Underwriters,FinancialInstitutions,etc.

SubmitDraftOfferDocumenttoSEBIwithoutmentioningCouponRateorPrice

CirculateofferDocumentamongtheSyndicateMembers

AskforBidsonPriceandQualityofSecurities

AggregateandforwardallofferstoBookRunner

RuntheBooktomaintainarecordofSubscribersandtheirOrders

ConsultwithIssuerandDeterminetheissuePriceasWeightedAverageoftheOffersReceived

FirmupUnderwritingCommitments

AllotSecuritiesAmongSyndicateMembers

SecuritiesIssuedandListed

TradingCommencesonExchanges

RegulatoryFrameworkTheBookBuildingguidelineswerefirstintroducedbySEBIin1995(clarificationXIII,dated12.10.95)foroptimumpricediscoveryofcorporatesecurities.TheSEBI,fromtimetotimemodifiestheguidelinesinordertoupgradingtheexistingmechanism.TheSEBIinitspressreleasedated7thSeptember,1998prescribedthefreshguidelinesforbookbuildingmechanismafterthoroughmodificationanditwasagainmodifiedin2001(CircularNo.2,dated6.12.2001)and2003(CircularNo.11,dated14.08.2003).


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SomeoftheguidelinesofSEBIare:1.InJanuary2000,SEBIhasissuedacompendiumofguidelines,circularsandinstructionstomerchantbankersrelatingtoissueofcapital,includingthoseonthebook-buildingmechanism.Thecompendiumincludesamodeltimeframeforbook-building:Afterthepricehasbeendeterminedonthebasisofbidding,statutorypublicadvertisementsforacontinuousthreedayscontaining,interalia,thepriceaswellasatableshowingthenumberofsecuritiesandtheamountpayablebyaninvestor,basedonthepricedetermined,shallbeissuedandtheintervalbetweentheadvertisementandissueopeningdateshouldbeaminimumoffivedays.2.Thedraftprospectustobecirculatedhastoindicatethepricebandwithinwhichthesecuritiesarebeingofferedforsubscription.Thebidshavetobewithinthepricebands.Biddingispermissibleonlyifanelectronically-linkedtransparentfacilityisused.Anissuingcompanycanalsofixaminimumbidsize.Aninitialbidcanbechangedbeforethefinalrateisdetermined.3.TheProspectivebidderswereadvisedtoreadtheRedherringprospectuscarefully.AccordingtotheAct,aRedherringprospectusmeansaprospectusthatdoesnothavecompleteparticularsonthepriceandthequantumofsecuritiesoffered.4.Theyear2000,AmendmenttotheActgavelegalcloaktothebook-buildingroutebyallowingcirculationoftheinformationmemorandumandtheredherringprospectus.AccordingtotheAct,aprocessistobeundertakenpriortothefilingofaprospectusbywhichademandforthesecuritiesproposedtobeissuedbyacompanyiselicited,thepriceandthetermsoftheissueofsuchsecuritiesareassessedbymeansofanotice,circular,advertisementordocument.Incidentally,theworkinggroupontheComprehensiveCompaniesBill,1997(sincelapsed)hadadvocatedintroductionofbook-building.Itdefinedt

hetermasaninternationalpracticethatreferstocollectingordersfrominvestmentbankersandlargeinvestorsbasedonanindicativepricerange.Incapitalmarkets,withsufficientwidthanddepth,suchapre-issueexerciseoftenallowstheissuetogetabetterideaofthedemandandthefinalofferpriceofanintendedpublicoffer.

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5.SEBI(DisclosureandInvestorProtection)Guidelines,2000containsprovisionsforbookbuildingunderchapterXIthatincludesguidelinesfor75percentbookbuildingprocess,100percentbook-buildingprocess,disclosurerequirements,allocation/allotmentprocedureandmaintenanceofbooksandrecords.AccordingtotheSEBI,apublicissuethroughBookBuildingrouteshouldconsistoftwoportions:(a)TheBookBuildingportionand(b)Thefixedpriceportion.Thefixedpriceportionisconductedlikenormalpublicissues(conventionallyfollowedearlier)afterthebookbuiltportionduringwhichtheissuepriceisfixedafterthebidclosingdate.Basically,anissuercompanyproposingtoissuecapitalthroughbookbuildingshallcomplywiththeguidelinesprescribedbySEBI.However,themainthemeofSEBIguidelinesregardingbookbuildingcanbepresentedataglanceinthefollowingmanner:

1.75%BookBuildingprocess:Underthisprocess25%oftheissueistobesoldatafixedpriceandthebalance75%throughtheBookBuildingprocess.

TOTALPUBLICISSUE(i.e.netoffertothepublic)

BOOKBUILDINGMETHOD

FIXEDPRICEMETHOD

75%ofthepublicissuecanbeofferedtoinstitutionalinvestorswhohadparticipatedinthebiddingprocess.

25%ofthepublicissuecanbeofferedtothepublicthroughprospectusandshallbereservedforallocationtoindividualinvestorswhohadnotparticipatedinthebiddingprocess.

75%BookBuildingProcess


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2.OffertopublicthroughBookbuildingprocess:Theprocessspecifiesthatanissuercompanymaymakeanissueofsecuritiestothepublicthroughprospectusinthefollowingmanner:a.100%ofthenetoffertothepublicthroughbook-buildingprocess,orb.75%ofthenetoffertothepublicthroughbook-buildingprocessand25%ofthenetoffertothepublicatthepricedeterminedthroughbookbuildingprocess.

100%ofthenetoffertothepublicthrough100%BookBuildingprocess

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75%ofthenetoffertothepublicthroughBookBuildingprocess

Thenetoffertothepublic,underthisprocessshallbefullyunderwrittenbythesyndicatemembers/bookrunningleadmanagers.ThesyndicatemembersaretoenterintoanunderwrittenagreementwiththeBRLMsindicatingthenumberofsecuritieswhichtheywouldliketosubscribeatthepre-determinedpriceandBRLMsshallinturnenterintoanunderwrittenagreementwiththeissuercompany.Ifthesyndicatemembersarenotabletofulfilltheirunderwrittenobligations,theBRLMsshallberesponsibleforbringingintheamountinvolved.Thebidremainsopenforatleastfivedays.Thedateofopeningaswellasclosingofthebidding,thenamesandaddressesofBRLMs,syndicatemembers,biddingterminalsforacceptingthebidsmustbementionedintheadvertisement.

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RecentChangesinBook-BuildingMechanism:TheSecuritiesandExchangeBoardofIndiaonMarch29,2005announcedsweepingchangesintheIPOnorms.Theyareasfollows:1.Increasedallocationforretailinvestorsinbook-builtissuefrom25percentto35percentandhasalsochangedthedefinitionoftheretailcategory.2.ThemarketregulatorhasnowpermittedretailinvestorstoapplyforRs.1lakhworthofsharesinabook-builtissueagainstRs.50,000earlier.Forthispurpose,SEBIhasredefinedtheretailindividualinvestorasonewhoappliesorbidsforsecuritiesoforforavaluenotexceedingRs.1lakh.3.Ithasreducedthenoninstitutionalcategory,popularlyknownashighnetworthindividuals(HNI),allocationfrom25percentto15percent.4.Institutionalinvestorsincludeforeignfinancialinstitutions(FII)banks,mutualfundsandIndianfinancialinstitutionslikeLICorIDBI.5.ThechangeshavebeenmadeintheSEBI(DIP)Guidelines,2000onthebasisofrecommendationsmadebySEBIsprimarymarketadvisorycommittee.6.ThenewnormswillbeapplicabletoallpublicissueswhosedraftoffersdocumentsarefiledwithSEBIonorafterApril4,2005.7.SEBIhasdecidedtoreducethebiddingperiodfromthecurrent5to10days(includingholidays)to3to7workingdays.8.Ithasalsoprovidedmoreflexibilityforlistedcompaniestodisclosepriceband/floorpriceforpublicissuesonedaybeforebidopening.9.SEBIhasdecidedtogiveanoptiontolistedissuerstoeitherdisclosepricebandinRHP/applicationform/abridgedprospectus(currentpractice)ortodisclosethepriceband/floorpriceatleastonedaybeforebidopening.10.Itisproposedtoamendtheguidelinestoimprovecontentsandensureuniformityindatadisplayonthewebsitesofthestockexchanges.Thedatewillbemade

availableforafurtherperiodofthreedaysaftertheclosureofthebids/issue.

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LimitationsofBookBuildingMechanismRetailinvestorsarenotfreefromcertaindisadvantagescomparedtoinstitutionalinvestorsinBookBuilding,whichdoesnotprovideanappropriatepricediscoverymechanism.Itisthemainreasonwhysmallinvestorshavestayedawayfromthemarket.ItneedschangestomakeitmoresuitabletotheIndiancontextandtheconditionsprevailingintheIndiancapitalmarket.IntheIPOsthroughtheBook-Buildingroute,itwouldbedifficulttofinddubiousissuesofthekindthatputoffinvestors.Thebook-buildingsystemhasvariouslimitations.Someofthemareasareasfollows:1.Book-buildingisappropriateformegaissuesonly.Inthecaseofthepotentialinvestors,thecompaniescanadjusttheattributesoftheofferaccordingtothepreferencesofthepotentialinvestors.Itmaynotbepossibleinbigissuessincetherisk-returnpreferenceoftheinvestorscannotbeestimatedeasily;2.Theissuercompanyshouldbefundamentallystrongandwellknowntotheinvestors;3.Thebook-buildingsystemworksveryefficientlyinmaturedmarketconditions.Insuchcircumstances,4.Theinvestorsareawareofthevariousparametersaffectingthemarketpriceofthesecurities.But,suchconditionsarenotcommonlyfoundinpractice;5.Thereisapossibilityofpriceriggingonlistingaspromotersmaytrytobailoutsyndicatemembers.

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GreenShoeOptionInmostofthecases,itisexperiencedthatIPOthroughBookBuildingmethodinIndiaturnsouttobeoverpricedorunderpricedaftertheirlistingofthemandultimatelythesmallinvestorsbecomeanetlooser.IftheIPOisoverpriceditcreatesabadfeelingininvestorsmindasinitialreturnstothemmaybenegativeatthatpointoftime.Ontheotherside,ifthepricesintheopenmarketfallbelowtheissueprice,smallinvestorsmaystartsellingtheirsecuritiestominimizelosses.Therefore,therewasavitalneedofamarketstabilizertosmoothentheswingsintheopenmarketpriceofanewlylistedshare,afteraninitialpublicoffering.Marketstabilizationisthemechanismbywhichstabilizingagentactsonbehalfoftheissuercompany,buysanewlyissuedsecurityforthelimitedpurposeofpreventingadeclininginthenewsecuritysopenmarketpriceinordertofacilitateitsdistributiontothepublic.ItcanpreventtheIPOfromhugepricefluctuationsandsaveinvestorsfrompotentialloss.SuchmechanismisknownasGreenShoeOption(GSO)whichisaninternationallyrecognizedformarketstabilization.So,GSOcanrectifythedemandandsupplyimbalancesandcanstabilizethepriceofthestock.ItowesitsorigintotheGreenShoeCompanywhichusedthisoptionforthefirsttimethroughouttheWorld.ICICIBankhas,usedGreenShoeOptioninfirsttimeincaseofitspublicissuethroughthebookbuildingmechanisminIndia.Assuch,suchimportantmechanismi.e.GSOinthesystemofinitialpublicofferings(IPOs)usingbookbuildingmethodwasrecognizedbySEBIinIndiathroughitsnewguidelineson14.08.2003(vide

SEBI/CFD/DIL/DIP/CircularNo.11).Incaseaninitialpublicofferofequityshar

esismadebyanissuercompanythroughthebookbuildingmechanism,theGreenShoeoption(GSO)canbeusedbysuchcompanyforstabilizingthepostlistingpriceofitsshares,subjecttotheguidelinesprescribedbySEBI.AccordingtoSEBIguidelines,acompanydesirousofavailingtheGSOshallintheresolutionofthegeneralmeetingauthorizingthepublicissue,seekauthorizationalsoforthepossibilityofallotmentoffurthersharestothestabilizingagent(SA).Thecompanyshallappointoneoftheleadbookrunners,amongsttheissuemanagementteam,asthestabilizingagent(SA),whowillberesponsibleforthepricestabilizationprocess,ifrequired.TheSAshallenterintoanagreementwiththeissuercompany,priortofilingof

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offerdocumentwithSEBI,clearlystatingallthetermsandconditionsrelatingtothisoptionincludingfeescharged/expensestobeincurredbySAforthispurpose.TheSAshallalsoenterintoanagreementwiththepromoter(s)whowilllendtheirshares,specifyingthemaximumnumberofsharesthatmaybeborrowedfromthepromoters,whichshallnotbeinexcessof15%ofthetotalissuesize.Thestabilizationmechanismshallbeavailablefortheperioddisclosedbythecompanyintheprospectus,whichshallnotexceed30daysfromthedatewhentradingpermissionwasgivenbytheexchange(s).

ConclusionBookBuildingprocessaimsatfairpricingoftheissuewhichissupposedtoemergeoutofoffersmadebyvariousinvestors.OnequestionmayarisewhetherbookbuildingistherightmechanismforfairpricingdiscoveryinIPOs?TheanswermaybeinthenegativebecauseafloorpriceisfixedfortheBookBuildingbelowwhichnobidcanbeaccepted.SinceinvestorsparticipatethroughBookBuildingprocessinmakingfairpricingofIPOswherethereisnoceilingprice,thereshouldnotbeanyfloorprice.Inadditiontothis,unlikeinternationalmarket,Indiahasnotreachedthestageofdevelopmentoftheinstitutionalframeworktoexperimentwiththebookbuildingprocessbecauseretailinvestors(i.e.individualinvestors)arestillnowanintegralpartofIndiancapitalmarket.Iftheinterestsofthesmallinvestorsarenotsafeguardedappropriately,thismaybeverydangeroustotheprimarycapitalmarket.AlthoughonlytwobookbuiltissuesHughessoftwareandHCLTechnologieshavegivenproperreturnstotheshareholdersin1999andMarutiUdyogin2003buttheotherfourbookbuiltissuesof

ShreeRamaMultitech,Cadila,CinevistaandMascotsystemweretradingathugediscountstotheirissuepricerangingbetween35-50%.

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5544374 book building process

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