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Tender or Book building Process

Tender or Book building Process

Tender or  Book building Process:When a company plans for raising of funds from the market, the book building method is one such way to raise more funds. After accepting the free pricing mechanism by the SEBI, the Book building process has acquired too much significance and has opened a new lead in development of capital market.

A company can use the process of book building to fine tune its price of issue. When a company employs book building mechanism, it does not pre-determine the issue price (in case of equity shares) or interest rate (in case of debentures) and invite subscription to the issue.

Tender or  Book building Process

Instead it starts with an indicative price band (or interest band) which is determined through consultative process with its merchant banker and asks its merchant banker to invite bids from prospective investors at different prices (or different rates). Those who bid are required to pay the full amount.

Based on the response received from investors the final price is selected. The merchant banker (called in this case Book Runner) has to manage the entire book building process. Investors who have bid a price equal to or more than the final price selected are given allotment at the final price selected. Those who have bid for a lower price will get their money refunded.

In India, there are two options for book building process.

(a) 100% of net offer to public through the book building route.

(b) 75% of net offer to public through book building process and 25% through the fixed price portion.

A company making an initial public offer of equity shares through the book-building mechanism can avail of the green shoe option (GSO) for stabilising the post-listing price of its shares.

The GSO means an option of allocating shares in excess of the shares included in the public issue andoperating a post listing price stabilising mechanism through a stabilising agent (SA).

Tender or Book building Process

The concerned issuing company should seek authorisation for the possibility of allotment of further issues to the SA at the end of the stabilising period together with the authorisation for the public issue in the general meeting of its shareholders. It should appoint one of the lead book runners as the SA who would be responsible for price stabilisation process. The SA should enter into an agreement with the issuer company prior to the filling of the offer document with SEBI, clearly stating all the terms and conditions relating to GSO including fees charged/expenses to be incurred by him for this purpose. He should also enter into an agreement with the promoter(s) who wouldlend their shares, specifying the maximum number of shares that may be borrowed from their promoters.

But in no case exceeding 15% of the total issue size. The details of these two agreements should be disclosed in the draft red herring prospectus, red herring prospectus and final prospectus.

To stabilise the post listing prices of the shares, the SA would determine the timing of buying them, the quantity to be bought, the prices at which to be bought and so on. In case the SA does not buy shares to the extent of their over allotment from the market, the issuer company should allot shares to the extent of the shortfall in dematerialised form to the GSO Demat account within 5 days of the closure of the stabilisation period. Those would be returned to the promoters by the SA in lieu of those borrowed from them and the GSO Demat account would be closed.

Tender or Book building Process

In an issue of securities to the public through a prospectus, the option for 100% book building is available to any issuer company. Reservation for firm allotment to the extent of the percentage specified in the relevant SEBI guidelines can be made only to promoters, ‘permanent employees of the issuer company and in the case of new company to the permanent employees of the promoting company’. It can also be made to shareholders of the promoting companies, in the case of new company and shareholders of group companies in the case of existing company either on a competitive basis or on a firm allotment basis. The issuer company should appoint eligible merchant bankers as book runner(s) and their names should be mentioned in the draft prospectus. The lead merchant banker should act as the lead book runner and the other eligible merchant bankers are termed as co-book runner.

The issuer company should compulsorily offer an additional 10% of the issue size offered to the public through the prospectus.

The greatest advantage of the book building process are:

(a) This allows for price and demand discovery.

(b) The cost of issue is much less than the other traditional methods of raising capital.

(c) In book building, the demand for shares is known before the issue closes. In fact, if there is not much demand the issue may be deferred and can be rescheduled after having realised the temper of the market.

Tender or Book building Process


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