-BOOK BUILDING.ppt

7/30/2019 -BOOK BUILDING.ppt

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PRESENTED BY: MOHAMMAD DANIYAL

KHANSHUMAILA ZEHRI

YASRA YAFEEZ

YAMNA SHUMAS 1


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Public issue of common shares is essentiallycarried out in two ways:

Fixed price method, and

Book-building method


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Book-building is a process of price discoveryused in public offers. The issuer sets a baseprice and a band within which the investor is

allowed to bid for shares.

Example: base price Rs 80

Range Rs 80 - Rs 100


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When bidding for the shares, investors have todecide at which price they would like to bid forthe shares, for e.g. Rs 80, Rs 90 or Rs 100. Theycan bid for the shares at any price within thisrange

Based on the demand and supply of the shares,the final price is fixed. The lowest price (Rs 80) isknown as the floor price and the highest price(Rs 100) is known as cap price.


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A company planning an IPO appoints amerchant bank as a book runner. Then the

company issues a prospectus that does notmention the price, but provides other detailsrelated to the issue size, the companysoperating area and business, the promoters and

future plans among other disclosures.A particular time frame is also fixed as thebidding period. Then the book runner builds anorder book that collates bids from various

investors. Potential investors are allowed torevise their bids at any time during the biddingperiod


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The price at which the shares are allotted is

known as cut off price. The entire process beginswith the selection of the lead manager, aninvestment banker whose job is to bring the issueto the public.

Once the offer period is over, the lead managerand issuing company fix the price at which theshares are sold to the investors. If the issue price

is less than the cap price, the investors who bid atthe cap price will get a refund and those who bidat the floor price will end up paying theadditional money.

The Cut Off Price


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The cut-off price is arrived at by the method ofDutch auction. In a Dutch auction the price of anitem is lowered, until it gets its first bid and thenthe item is sold at that price.

Let's say a company wants to issue one millionshares

The floor price for one share is Rs 48 and the bandis between Rs 48 and Rs 55.


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At Rs 55, on the basis of the bids received, the

investors are ready to buy 200,000 shares. So thecut-off price cannot be set at Rs 55 as only200,000 shares will be sold.

So as a next step, the price is lowered to Rs 54. AtRs 54, investors are ready to buy 400,000 shares.So if the cut-off price is set at Rs 54, 600,000

shares will be sold. This still leaves 400,000shares to be sold


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The price is now lowered to Rs 53. At Rs53,

investors are ready to buy 400,000 shares. Nowif the cut-off price is set at Rs 53, all one millionshares will be sold.

Investors who had applied for shares at Rs 55and Rs 54 will also be issued shares at Rs 53.The extra money paid by these investors while

applying will be returned to them.


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Green Shoe option allows underwriters to sell

additional shares in a registered securities offeringat the offering price, if demand for the securitiesexceeds the original amount offered. The green shoecan vary in size and be up to 15% of the original

number of shares offered.

Since the demand is greater than supply the prices

tend to rise way beyond what the fundamentals ofthe stock would justify. So in order to stabilize thepost-issue price of the stock, the issuer has to issuemore shares in case of oversubscription.


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The Securities and Exchange Commission of Pakistan(SECP) had approved Book Building Process as part of theListing Regulations of the Karachi Stock Exchange, which isin line with international best practices and standards.(2008)

Fatima fertilizer (Jan 2010) Ghani Gases Limitd (1st) TPL direct insurance (June 2011) PPL (March 2012)

GDRs through book building MCB 150m UBL6 50m OGDC 800m


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o Book building process is a commonpractice used for marketing a public offer ofequity shares of a company. However, bookbuilding is a transparent and flexible price

discovery method of initial publicofferings(IPOs) in which price of securitiesis fixed by the issuer company along withthe Book Running Lead Manager (BRLM) on

the basis of feedback received frominvestors as well as market intermediaries

during a certain period.

Book Building Process


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o The Issuer who is planning an offer nominateslead merchant banker(s) as 'book runners'.o The Issuer specifies the number of securities to

be issued and the price band for the bids.o The Issuer also appoints syndicate members

with whom orders are to be placed by theinvestors.

o The syndicate members input the orders into an'electronic book'. This process is called 'bidding'and is similar to open auction.

o The book normally remains open for a Period of5 days.

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o Bids have to be entered within the specified priceband.

o Bids can be revised by the bidders before the bookcloses.

o On the close of the book building period, the bookrunners evaluate the bids on the basis of thedemand at various price levels.

o The book runners and the Issuer decide the finalprice at which the securities shall be issued.

o

Generally, the number of shares are fixed, the issuesize gets frozen based on the final price per share.

o Allocation of securities is made to the successfulbidders. The rest get refund orders.

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o There are three kinds of investors in a book-

building issue.

o The retail individual investor (RII), the non-

institutional investor (NII) and the QualifiedInstitutional Buyers (QIBs).

o

RII is an investor who applies for stocks for avalue of not more than Rs 100,000. Any bidexceeding this amount is considered in theNII category.

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o Each of these categories is allocated a certainpercentage of the total issue. The total allotment tothe RII category has to be at least 35% of the totalissue. RIIs also have an option of applying at thecut-off price. This option is not available to otherclasses of investors. NIIs are to be given at least15% of the total issue.

o And the QIBs are to be issued not more than 50%of the total issue. Allotment to RIIs and NIIs ismade through a proportionate allotment system.The allotment to the QIBs is at the discretion of theBRLM.

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o Qualified Institutional Buyers (QIBs) those

institutional investors who are generallyperceived to possess expertise and thefinancial muscle to evaluate and invest inthe capital markets.

Qualified Institutional Buyer shall mean:

a) Public financial institution as defined insection 4A of the Companies Act, 1956;

b) Scheduled commercial banks;

c) Mutual Funds;

d) Foreign institutional investor registered.

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e) Multilateral and bilateral developmentfinancial institutions;

f) Venture Capital funds.

g) Foreign Venture Capital investors.

h) State Industrial DevelopmentCorporations.

i) Insurance Companies registered with theInsurance Regulatory and Development

Authority (IRDA).

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FIXED PRICE BOOK BUILDING

PRICEPRICE AT WHICHSECURITIES ARE OFFERED /

WOULD BE ALLOTED ISMADE KNOWN INADVANCE TO THEINVESTORS

THE ISSUER SETS A BASEPRICE AND A BAND

WITHIN WHICH THEINVESTOR IS ALLOWED TOBID FOR SHARES

DEMANDDEMAND IS KNOWN ONLYAFTER THE CLOSURE OF

THE ISSUE

BOOK IS BUILT BY BOOKRUNNER LEAD MANAGER

(BRLM) TO KNOW THEEVERYDAY DEMAND

PAYMENT100% ADVANCE PAYMENTHAS TO BE MADE BY THEINVESTORS AT THE TIME OFSUBSCRIPTION

PAYMENT IS DONE AFTERALLOCATION

RESERVATIONS50% OF THE RESERVATIONIS FOR THE SMALLINVESTORS AND 50% FORTHE OTHERS

60% IS RESERVED FOR QIBAND THERES ADISCRETIONARYALLOTMENT THAT DRIVESTHE LARGER ISSUERS TO GO

FOR THE BOOK BUILDINGPROCESS


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FIXED PRICE BOOK BUILDING

INVESTORS THE ISSUER HAS NODISCRETION OVER THEINVESTORS AS SHARESARE ISSUED TO THEGENERAL PUBLIC

THE ISSUER CANDECIDE TO ALLOCATESHARES TO ANYINVESTOR FALLINGWITHIN THE CUT OFFPRICE RANGE

LISTING OF SHARESON THE STOCKEXCHANGE

37 DAYS AFER THECLOSURE OF THE ISSUE

3 WEEKS AFTER THECLOSURE OF THEISSUE

ALLOTMENT OFSHARES

WITHIN 30 DAYS AFTERTHE CLOSURE OF THE

ISSUE

LEAD MANAGERIMMEDIATELY

ALLOCATES AFTERTHE PRICING IS DONE

VALUE OF THESHARES

NOT MAXIMUM SINCEPRICE IS SET BEFORE THEMARKETING PERIOD

MAXIMUM SINCEPRICE IS SET WITHACCORDANCE TO THEDEMAND


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o The price of an instrument is set in much more

realistic fashion.o The primary aim of book building process is to

fix the highest market price for shares andsecurities.

o As investors have a voice in the pricing of theissue, they have a greater certainty of beingallotted what they demand.

o The issue price is determined by the market. Asthere is a distant possibility of the market priceof share falling lower than issue price, investoris less likely to suffer from erosion of his

investment on listing. 21


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o Well organized capital raising with enhanced

issue procedures, which leads to a reduction in(a) issue costs (b) paper work and (c) leadtimes.

o Flexibility to increase/decrease price and/orsize of offering the issues is possible.

o There is transparency of allocations toinvestors.

Instant allotment and listing of placementportion of securities.

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o Book building is suitable only for mega issues.

o The issuer firm must be fundamentally strongand well known to the investors.

o The book building system functions very wellin matured market conditions. So, the investorsare knowledgeable of the various parametersinfluencing the market price of the securities.But, such conditions are generally not seen inpractice.

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