IPO Investing


Types of Issues: Fixed Price & Bookbuilding


There are two types of issues

Fixed Price Issues

When the issuer at the outset decides the issue price and mentions it in the offer document, it is in the offer document, it is commonly known as “Fixed price issue”

Book built issue: When the price of an issue is discovered on the basis of demand raised from the prospective investors at various investors ar various price levels, it is called ‘Book built issue’

Price Discovery through Book building 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 or 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.

Open Book building

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 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
Except as otherwise provided in the SEBI ICDR Regulations 2009, public issue shall be kept open for at least three working days but not more than ten working days including the days for which the issue is kept open in case of revision in price band.

In case the price band in a public issue made through the book building process is revised, the bidding (issue) period disclosed in the red herring prospectus shall be extended for a minimum period of three working days, provided that the total bidding period shall not exceed ten working days.
 
Pure Auction (Additional Book building 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 as illustrated in Schedule XI of SEBI ICDR Regulations 2009. 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 (FTI)

SEBI has introduced FTI in order to enable well‐established and compliant listed companies satisfying certain specific entry norms/conditions to access Indian Primary Market in a time effective manner. Such companies can proceed with FPOs / Right Issues by filing a copy of RHP / Prospectus with the RoC or the Letter of Offer with designated Stock Exchanges and SEBI. Such companies are not required to file Draft Offer Document for SEBI comments and to Stock Exchanges. Entry Norms for companies seeking to access Primary Market through Fast track route:

(i) The shares of the company have been listed on any stock exchange having nationwide terminals for a period of at least three years immediately preceding the date of filing of offer document with ROC/ SE.

(ii) The “average market capitalisation of public shareholding” of the company is at least Rs.3000 crore;

(iii) The annualized trading turnover of the shares of the company during six calendar months immediately preceding the month of filing of offer document with ROC/ SE has been at least two percent of the weighted average number of shares listed during the said six months period:

Provided that for issuers, whose public shareholding is less than fifteen per cent of its issued equity capital, the annualised trading turnover of its equity shares has to be at least two per cent of the weighted average number of equity shares available as free float during such six months’ period.

(iv) The company has redressed at least 95% of the total shareholder / investor grievances or complaints received till the end of the quarter immediately preceding the month of the date of filing of offer document with ROC/ SE.

(v) The company has complied with the listing agreement for a period of at least three years immediately preceding the filing of offer document with ROC/ SE.

(vi) The impact of auditors’ qualifications, if any, on the audited accounts of the company in respect of the financial years for which such accounts are disclosed in the offer document does not exceed 5% of the net profit/ loss after tax of the company for the respective years.

(vii) No prosecution proceedings or show cause notices issued by the Board are pending against the company or its promoters or whole time directors as on the date of filing of offer document with RoC/ SE and

 (viii) The entire shareholding of the promoter group is held in dematerialised form as on the reference date.


 

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Information provided herein is purely for dissemination of information and creating awareness among the investors about various aspects of investing. Although due care and diligence has been taken, the Institute of Company Secretaries of India (ICSI) shall not be responsible for any loss or damage resulting from any action taken by a person on the basis of the contents hosted on the website. It may also be noted that laws/regulations governing the markets are continuously evolving, hence an investor should familiarize himself with the latest laws/ regulations by visiting the relevant websites or contacting the relevant regulatory body.