Book Building method is an alternative method of offering shares to the general public. In contrary to the Par value method of offering the Initial Public Offering (IPO), Book value method tries to find the true price of the company and tries to efficiently price that
company. In simple terms, book building method is a process of price discovery of a company.
Book building methods involves chronological list of the following events before a company offers its shares to the public.
Book building process initiates when a company willing to raise capital through book building method hires an investment bank/underwriter to raise the required capital for the company. The investment banker/ underwriter, after carefully analyzing prospects of the company, the current market scenario, and economic conditions, sets a price, with the approval of the issuing company, which the investment banker/underwriter believe shall be well accepted in the market. The book runner then drafts a preliminary prospectus and should invite “Qualified Institution Investor (QIB)1” to submit a bid for the issue asking for the price and quantity of units at that price. QIB’s are allowed to bid in the price range set by road runner within the upper and lower limit of 20%. For example, Company XYX and the road runner set their base price for their share unit at Rs 500. In that case, QIB’s can bid in a price range of Rs 400 – Rs 600. The lower band of Rs 400 is called the floor price and the higher band of Rs 600 is called the cap price. The road runner then records and
generates a book of demand from the QIB’s and sets a cut-off price based on the bids generated by QIB’s.
| Cut off Price Determination for Offer of 1,000,000 Units to QIB’s | ||||
|---|---|---|---|---|
| S. No | Price | Units | Number of Shares Applied | Allotment |
| 1 | 250 | 50,000 | 50,000 | 50,000 |
| 2 | 245 | 150,000 | 200,000 | 150,000 |
| 3 | 235 | 200,000 | 400,000 | 200,000 |
| 4 | 230 | 250,000 | 650,000 | 250,000 |
| 5 | 228 | 275,000 | 925,000 | 275,000 |
| 6 | 225 | 500,000 | 1,425,000 | 75,000 |
| 7 | 220 | 300,000 | 1,725,000 | 0 |
| 8 | 218 | 350,000 | 2,075,000 | 0 |
| 9 | 218 | 285,000 | 2,360,000 | 0 |
| 10 | 212 | 150,000 | 2,510,000 | 0 |
** Since the shares will be fully subscribed at a price of 225 the cut off rate determined shall be 225
Example as mentioned in Book Building Guideline, 2077
1As of 19/04/2021 there are 88 QIB Approved by Securities Board of Nepal (SEBON).
The book runner, in the time asking the intent price from the QIB’s, are required to organize a road show program. Road show program is of a particular importance to the QIB’s, as the QIB’s get a chance to interact with the company directly and get to know the various fundamentals of the company like – the management and its governance, long term strategies of the company, intent and use of the fund and the key risk factors of the company.
The road runner, after the cut off price has been determined, are required to float the remaining shares to the public. But, before floating shares to the general public, the company along with issue manager should draft a final prospectus which is to be submitted to the Regulatory Board. The prospectus shall contain information such as cut off price determination, number of QIB’s who have been allotted the shares and fundamentals and management changes in the company, if any. If the Board is satisfied with the final prospectus; the board will give permission within 7 days to float shares to the general public at a price 10 percent below the cut off price. From our previous example, the cut off price is Rs 225, and as such the issue price for public will be Rs 204.50. After the allotment of shares to the general public the overall book building method is complete.
Not all companies can choose book building method of IPO offering. Securities Board of Nepal (SEBON) has listed certain guidelines for companies to be eligible to offer share through book building, and those guidelines are;
- Company should operate at a profit for the last 3 years.
- Approval from the AGM of the company to issue IPO through ‘Book Building’
- Net worth per share should be 150 percent of the per share capital
- The company should have average or above average ratings from the rating agencies.
Who are the Qualified Institutional Buyers (QIB)
Qualified institutional buyers are institution approved and recognized by SEBON, who can participate in book building process. Various QIB’s are;
- Merchant Banks
- Mutual Funds
- Listed Companies
- Securities Trader
- Organizations having a net worth of at least Rs. 100 Million, established with the objective to invest in securities
- Other entities as approved by SEBON
1As of 19/04/2021 there are 88 QIB Approved by Securities Board of Nepal (SEBON).
2As per Book Building Guideline, 2077 QIB’s are segregated 40% and General Public are segregated 60% of the total issue.
3ICRA Nepal and CARE Rating Nepal are Credit rating agencies in Nepal.
Note: Minimum Units of application and allotment through book building method is 50.