Book Building
The method of offering shares by providing a price range is called book building method
Book Building is the process by which an underwriter figures out the price of the initial public offering (IPO) of a company. It is is a process of price discovery. During the process, the issuer ties with a selected group of individuals/agencies for private placement.This helps in evaluating the worthiness of the instrument offered. It is done on a wholesale basis. This creates a clear and transparent after market. This system works effectively in matured market conditions. In Book building, the underwriter has to publicize the details of the bids to keep transparency in check.
IPOs are offered at prices as detailed by their underwriters. During the IPO or Follow on Public Offer (FPO), the company offers its shares to the public either at fixed price or offers a price range, so that the investors can decide on the right price. The method of offering shares by providing a price range is called book building method. This method provides an opportunity to the market to discover price for the securities which are on offer.
In short, book building is the process through which an underwriter comes up with the price for the IPO being publicly offered. The underwriter of the IPO is normally an investment bank and this party determines the price by inviting institutional investors like fund managers to submit their respective bids for the price they would be willing to pay for a certain number of shares.
Hence book building is the means by which an underwriter can determine the overall price at which a company’s IPO will be publicly offered. To discover this price, the book-building process involves generating and keeping a record of investor demand for these shares before the underwriter arrives at their issuance price. Companies often price their IPOs via book building meaning it is seen as a kind of de facto method.
The underwriter of the IPO is normally an investment bank and this party determines the price by inviting institutional investors like fund managers to submit their respective bids for the price they would be willing to pay for a certain number of shares.
Investors will not get the exact stake price. A price band will be available. Investors will soon be given to the stocks subscribed. Only after allotting the share, the investors will be charged.