INTRODUCTION

To keep pace with the globalization and liberalization process, the government of India was very keen to bring the capital market in line with international practices through gradual deregulation of the economy. It led to liberalization of capital market in the country with more expectations from primary market to meet the growing needs for funds for investment in trade and industry. Therefore, there was a vital need to strengthen the capital market which, it felt, could only be achieved through structural modifications, introducing new mechanism and instruments, and by taking steps for safeguarding the interest of the investors through more disclosures and transparency. As such, an important mechanism named as Book building in the system of initial public offerings (IPOs) was recognized by SEBI in India after having the recommendations of the committee under the chairmanship of Y. H. Malegam in October, 1995. SEBI guidelines recognized book building as an alternative mechanism of pricing. Under this approach, a portion of the issue is reserved for institutional and corporate investors.

Book building refers to the process of generating, capturing, and recording investor demand for shares during an IPO (or other securities during their issuance process) in order to support efficient price discovery. Usually, the issuer appoints a major investment bank to act as a major securities underwriter or book runner. The “book” is the off-market collation of investor demand by the book runner and is confidential to the book runner, issuer, and underwriter. Where shares are acquired, or transferred via a book build, the transfer occurs off-market, and the transfer is not guaranteed by an exchange’s clearing house. Where an underwriter has been appointed, the underwriter bears the risk of non-payment by an acquirer or non-delivery by the seller.

The IPO market has undergone a sea change. We as investors can only sit back and remember the days of under priced IPO’s in the Controller of Capital issue days-where getting allotment was akin to winning a lottery. Then came the era of free pricing-when many an over priced issue hit the market , still there were some pearls to be found as suddenly some sectors got re rated by the market and the price of the issues seemed reasonable. Then in 1998 Securities and Exchange Board of India (SEBI) allowed every issuer of equity shares of Rs 250 million and above to have an option to make an issue through the Book Building Process. The age of the big boys had arrived-the small investor’s role in the IPO market was to get marginalised.

Book Building refers to the collection of bids from investors, which is based on an indicative price range, the issue price being fixed after the bid closing date. The principal intermediaries involved in a book building process are the company, Book Running Lead Manager (BRLM) and syndicate members who are intermediaries registered with SEBI and

eligible to act as underwriters. Syndicate members are appointed by the BRLM. The book building process is undertaken basically to determine investor appetite for a share at a particular price. It is undertaken before making a public offer and it helps determine the issue price and the number of shares to be issued. The process begins with consultations between issuer company, the fund managers and the institutional investors. The above process is used to derive a price-band with a median point at which the demand for the company’s stock is maximum. The issuer company, in tandem with the lead manager and the book runner, then fixes a price band for the issue. The investor is informed of the price band and he then bids at a price he thinks appropriate.

The bidding is done just like an open auction. The bidding period is kept open for at least five working days. The advertisement announcing the bidding contains the date of the opening of the offer and the closing date. The issue document contains the name of syndicate members who are entitled to receive the bids. Even the offer document contains the conditions of accepting the bids and the procedure of bidding. The bidding centers are electronically connected to maintain transparency and also eliminate the time lag between making and receiving of the bid. Individual and institutional investors have to place their bids only through the ‘syndicate members’ who have the right to vet the bids. The bids can be revised innumerable number of times before the issue closes. To maintain transparency in the bidding process, at the end of every bidding session the demand for the issue is shown in the graph format on the terminals.

Once the company gets various bids from the investor, it decides the final price at which it is willing to issue the stock. Since the company has already decided the quantum of funds it wants to raise it finalizes the number of shares it will now issue at the price fixed. The issue price for the placement portion and offer to the public shall be the same.

As per the SEBI rules known to everyone, a company going public has to offer its minimum 25 per cent of issued post-issue equity to the public and maximum of 75 per cent post issue equity can remain with the promoters. However, by a recent amendment large software companies making an issue of over Rs.200 crores (including premium) need offer only a minimum of 10 per cent of post issue equity. Out of the total public issue size, 90 per cent of the issue can be offered through book building process while only 10 per cent of the issue can be offered via fixed price portion. Out of the book building portion, a minimum of 10 per cent of the issue size has to be reserved for retail bidders while 75 per cent of the issue can be offered to wholesale bidders.

A retail investor in book building process is an investor who has to bid for a minimum of 100 equity shares and in multiples of 50 equity shares thereafter subject to a maximum of 2000 equity shares. In case of wholesale bidders the bid has to for a minimum of 500 equity shares and in multiples of 50 equity shares thereafter. In case of over-subscription in

the retail category, allocation will be made on a proportionate basis and in consultation with the regional stock exchange. In case of balance book-built portion the same shall be available to wholesale bidders and the company in consultation with the Allocation Committee has the discretion to allocate to any of the investors, who have bid, at or above the issue price in wholesale bidder category.

While bidding for the equity shares of the company in a book built portion, each bidder shall, with the submission of the bid-cum-application form, draw a cheque/demand draft/stockinvest for the maximum amount of this bid in favor of the escrow account of the escrow collection bank. Bid form accompanied by cash is not accepted.

However, the syndicate member(s) at their discretion may waive such requirement of payment at the time of submission of the did form for wholesale bidders. Where such payment at the time of bidding is waived at the discretion of the syndicate member or where there is a shortfall as a result of cut-off price being more than highest price in the indicative price band, the issue price or the difference, as the case may be would be paid, favoring the escrow account within 4 days on communication by the BRLM of the list of bidders who have been allocated equity shares to the syndicate members.

As a result of the book building process , by merely offering 6.25 per cent of the post issue equity, the shares of the company can get listed on the major stock exchanges like NSE and BSE. Here, after listing, due to low floating stock, it becomes very easy for the vested interests to manipulate the price. Also, out of 18.75 per cent of the post issue equity, reserved for wholesale bidders, the said shares are conveniently allotted by the company and BRLM to persons of their choice and selection. Ironically, these allottees can get the allotment of shares without paying a single penny along with their bids. Due to these flaws and inadequate provisions, SEBI has thought of streamlining book building norms and it was decided that to avoid conflict of interests during book-building and maintain the integrity of the process and an arms-length relationship between those involved in book building and their associates.

Though still a new concept, book building is here to stay and represents a capital market which is in the process of maturing.

Book Building Process refers to the issue of shares under an Initial Public Offer. In this process the issuing company gives a certain price band within which the investors have to apply for the shares of the company. Then the issuing company based on certain criteria decides what is the price at which it is going to issue the shares. This is illustrated in the following:

Assume a price band of Rs. 15 to Rs. 19 per share, issue size of 3,000 equity shares and receipt of five bids from bidders, details of which are shown in the file (download above). 

The highest price at which the issuer is able to issue the desired number of shares is the price at which the book cuts off, i.e., Rs. 17 in the above example. Which means that the number of shares offered to the public will be subscribed to by them at or above such price The issuer, in consultation with the book running lead managers, will finalise the issue price at or below such cut off price, i.e., at or below Rs. 17. All bids at or above this issue price and cut-off bids are valid bids and are considered for allocation in the respective categories. The issue price is fixed after the bid closing date based on the price at which bids were made.

Book building is the most practical mechanism for the quick and efficient management of mega issues (including offers of sale).

Book Building means a phenomenon in which the exact issue of the shares / exact premium is determined on the basis of bids invited from the investors. In simple terms, book building is a mechanism by which the issue price is discovered on the basis of bids received from syndicate members/brokers and not by the issuers/merchant bankers. The process refers to the collection of bids from investors. The SEBI (Disclosure and Investor Protection) Guidelines, 2000, define the term `book-building' in a rather complex language as "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 such securities is assessed for determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document.''

Book building is a common practice in developed countries and has recently been making inroads into emerging markets as well. Bids may be submitted on-line, but the book is maintained off-market by the book runner and bids are confidential to the book runner. The price at which new shares are issued is determined after the book is closed at the discretion of the book runner in consultation with the issuer. Generally, bidding is by invitation only to clients of the book runner and, if any, lead manager, or co-manager. Generally, securities laws require additional disclosure requirements to be met if the issue is to be offered to all investors. Consequently, participation in a book build may be limited to certain classes of investors. If retail clients are invited to bid, retail bidders are generally required to bid at the final price, which is unknown at the time of the bid, due to the impracticability of collecting multiple price point bids from each retail client. Although bidding is by invitation, the issuer and book runner retain discretion to give some bidders a greater allocation of their bids than other investors. Typically, large institutional bidders receive preference over smaller retail bidders, by receiving a greater allocation as a proportion of their initial bid. All book building is

conducted ‘off-market’ and most stock exchanges have rules that require that on-market trading be halted during the book building process.

Participants of Book Building IPO

Institutional Investors Foreign Institutional Investors (FIIs) and MFs (Mutual Funds) 

HNI (High Networth Individuals) These individuals buy IPOs at large quantities. 

Retail Investors: These are the common investors whose maximum investment limit is Rs. 50,000. 

The key differences between acquiring shares via a book building (conducted off-market) and trading (conducted on-market) are:

1) Bids into the book are confidential vs. transparent bid and ask prices on a stock exchange;

2) Bidding is by invitation only (only clients of the book runner and any co-managers may bid);

3) The book runner and the issuer determine the price of the shares to be issued and the allocations of shares between bidders in their absolute discretion;

4) All shares are issued or transferred at the same price whereas on-market acquisitions provide for a multiple trading prices.

BOOK BUILDING AND FIXED PRICE OPTION IN THE IPOsA company may raise capital in the primary capital market through initial public offers (IPOs), rights issues and private placement. IPOs, the largest sources of funds in the primary capital market, to the company are basically an invitation by a company to the public to subscribe to its securities offered through prospectus. In fixed price process in IPOs, allotments of shares to all investors are made on proportionate basis.

BOOK BUILDING IN INDIAThe introduction of book-building in India in 1995 followed the recommendation of an expert committee appointed by SEBI under Y. H. Malegam "to review the (then) existing disclosure requirements in offer documents,'' two of the terms of reference being "the basis of pricing the issue'' and "whether substantial reduction was possible in the time taken for processing applications by SEBI.'' The committee recommended and SEBI accepted in November 1995 that the book-building route should be open to issuer companies, subject to certain terms and conditions. Some of the important terms and conditions were:

(a) The option should be available only to issues exceeding Rs. 100 crores;

(b) The issuer companies could either reserve the securities for firm allotment or avail themselves of the book-building process

(c) Draft prospectus to be submitted to SEBI could exclude information about the offer price;

(d) A book runner to be nominated from among the lead market bankers charged with specific responsibilities and the name submitted to SEB;I and

(e) The requirement of 25 per cent of the securities to be offered to the public will be applicable.

There have been several amendments/revisions to the above guidelines in 1996, 1997 and 2000.

Types of Book Building

The issue of securities through book building can be either through:

Ø     75% book building

Ø     100% book building

PROCESS

The main parties who are directly associated with book building process are the issuer company, the Book Runner Lead Manager (BRLM) and the syndicate members. The Book Runner Lead Manager (i.e. merchant banker) and the syndicate members who are the intermediaries are both eligible to act as underwriters. The steps which are usually followed in the book building process can be summarized below:

(1) The issuer company proposing an IPO appoints a lead merchant banker as a BRLM.

(2) Initially, the issuer company consults with the BRLM in drawing up a draft prospectus (i.e. offer document) which does not mention the price of the issues, but includes other details about the size of the issue, past history of the company, and a price band. The securities available to the public are separately identified as “net offer to the public”.

(3) The draft prospectus is filed with SEBI which gives it a legal standing.

(4) A definite period is fixed as the bid period and BRLM conducts awareness campaigns like advertisement, road shows etc.

(5)The BRLM appoints a syndicate member, a SEBI registered intermediary to underwrite the issues to the extent of “net offer to the public”.

(6) The BRLM is entitled to remuneration for conducting the Book Building process.

(7) The copy of the draft prospectus may be circulated by the BRLM to the institutional investors as well as to the syndicate members.

(8) The syndicate members create demand and ask each investor for the number of shares and the offer price.

(9) The BRLM receives the feedback about the investor’s bids through syndicate members.

(10) The prospective investors may revise their bids at any time during the bid period.

(11) The BRLM on receipts of the feedback from the syndicate members about the bid price and the quantity of shares applied has to build up an order book showing the demand for the shares of the company at various prices. The syndicate members must also maintain a record book for orders received from institutional investors for subscribing to the issue out of the placement portion.

(12) On receipts of the above information, the BRLM and the issuer company determine the issue price. This is known as the market-clearing price.

(13) The BRLM then closes the book in consultation with the issuer company and determine the issue size of (a) placement portion and (b) public offer portion.

(14) Once the final price is determined, the allocation of securities should be made by the BRLM based on prior commitment, investor’s quality, price aggression, earliness of bids etc. The bid of an institutional bidder, even if he has paid full amount may be rejected without being assigned any reason as the Book Building portion of institutional investors is left entirely at the discretion of the issuer company and the BRLM.

(15) The Final prospectus is filed with the registrar of companies within 2 days of determination of issue price and receipts of acknowledgement card from SEBI.

(16) Two different accounts for collection of application money, one for the private placement portion and the other for the public subscription should be opened by the issuer company.

(17) The placement portion is closed a day before the opening of the public issue through fixed price method. The BRLM is required to have the application forms along with the application money from the institutional buyers and the underwriters to the private placement portion.

(18) The allotment for the private placement portion shall be made on the 2nd day from the closure of the issue and the private placement portion is ready to be listed.

(19) The allotment and listing of issues under the public portion (i.e. fixed price portion) must be as per the existing statutory requirements.

(20) Finally, the SEBI has the right to inspect such records and books which are maintained by the BRLM and other intermediaries involved in the book building process.

How is the price fixed?

All the applications received till the last dates are analyzed and a final offer price, known as the cut-off price is arrived at. The final price is the equilibrium price or the highest price at which all the shares on offer can be sold smoothly. If your price is less than the final price, you will not get allotment. If your price is higher than the final price, the amount in excess of the final price is refunded if you get allotment. If you do not get

allotment, you should get your full refund of your money in 15 days after the final allotment is made. If you do not get your money or allotment in a month's time, you can demand interest at 15 per cent per annum on the money due.

Price Determination

The issue price is to be determined on the basis of market demand by the issuer in consultation with the book runner.

Case Company XYZ wants to issue 100 shares through book building. They demand is as follows.

Subscribed (No. of shares)

Price 

(Rs)50 10065 9080 8095 70105 60

The issue price will be that level at which all the shares get subscribed. In the above example, all the shares are being subscribed to between Rs 60 – Rs 70. Lets say at Rs 65 we are able to place all our shares, this then is the issue price (Rs 65).

The bid will be open for a minimum of five working days. The number of bidding centres will not be less than the collection centres as required by the SEBI guidelines. The applicants that have bid less than the issue price will be refunded their application money within the specified period. Successful bidders (bids equal to or greater than issue price) will be allotted their shares within the specified period. Bidders who have bid above the issue price will be refunded the surplus application money.

At least 15% of the book-building portion is to be reserved for non-institutional investors. These include Corporates, Overseas Corporate Bodies (OCB’s), Non–Resident Indians (NRI’s), High Networth Individuals (HNI’s), Hindu Undivided Family (HUF’s), Societies and Trusts.

In case of over subscription allotment to non-institutional investors will be made on pro-rata basis. However, for institutional investors the allotment will be on discretionary basis. Allotment is to be made within a period of 15 days from closure of the issue failing which the issuer will be liable to pay interest at the rate of 15% p.a. till the date of allotment.

CASE STUDY

Omkar Speciality Chemicals Limited is entering into primary market with an Initial Public Offer (IPO) of 8,100,000 Equity Shares of Rs 10 each. The IPO is opening on 24th Jan 2010 and the shares will be available for subscription up to 27th Jan 2010. The premium of the issue will be decided through a 100% Book Building Process. The price band for the issue has been fixed at Rs. 95 – Rs. 98 Per Equity Share. The company is likely to raise around Rs 79.38 Crore through the issue at the upper level of price band. Omkar Speciality Chemicals Ltd is mainly engaged in the manufacture and sale of speciality chemicals viz. selenium, compounds, iodine compounds, molybdenum compounds etc. and pharma intermediates viz. Potassium Iodate, Bismuth Ammonium Citrate, Bromoform etc.

The proceeds of the IPO are proposed to be utilized for setting up of new manufacturing facility at Unit 4 at Badlapur, Maharashtra, expansion of existing manufacturing facilities at Unit 1, Unit 2 & Unit 3 at Badlapur, Maharashtra, meeting Working Capital requirements, general corporate purposes and issue expenses.

The Promoters of the Company are Mr. Pravin Herlekar and Mr. Omkar Herlekar.

The equity shares offered through the IPO are proposed to be listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

Issue Detail:-Issue Open : 24th Jan 2010 – 27th Jan 2011Issue Type : 100% Book Built Issue IPOIssue Size : 8,100,000 Equity Shares of Rs 10 eachIssue Size : Rs 76.95 crore – Rs 79.38 CroreFace Value : Rs 10 Per Equity ShareIssue Price : Rs 95 – Rs. 98 Per Equity ShareMinimum Bid Quantity : 60 Shares (Rs. 5880 with 1 Lot) @ upper level of price bandMaximum Bid Quantity : 2040 Shares (Rs. 199920 with 34 Lots ) @ upper level of price bandListing At : BSE, NSE

The Sole Book Running Lead Manager (BRLM) to the offer is Almondz Global Securities Limited.

Incorporated in 2005, Omkar Speciality Chemicals Ltd is mainly engaged in the manufacture and sale of speciality chemicals viz. selenium, compounds, iodine compounds, molybdenum compounds etc. and pharma intermediates viz. Potassium Iodate, Bismuth Ammonium Citrate, Bromoform etc.

Company is primarily involved in the production of speciality chemicals and pharma intermediates. The Inorganic Intermediates include Molybdenum derivatives, Selenium derivatives, Iodine derivatives, Cobalt derivatives, Bismuth & Tungsten derivatives and the organic intermediates include Tartaric acid derivatives and other intermediates. These products find applications in various industries like Pharmaceutical Industry, Chemical Industry, Glass Industry, Cosmetics, Ceramic Pigments and Cattle & Poultry Feeds.

Company has four Units at MIDC, Badlapur (E), Dist: Thane, Maharashtra, India. Omkar Speciality Chemicals exporting their products to Europe, Canada, Asia, South America & Australia. The total exports constituted 8.69%, 12.35% and 7.97% of gross sales during FY 2008, FY 2009 and FY 2010 respectively.

Company Promoters:

The present Promoters of the Company are:1) Mr. Pravin Herlekar2) Mr. Omkar Herlekar

Company Financials:

Particulars For the year/period ended (in Rs. lakhs)31-Mar-10 31-Mar-09 30-Mar-08 30-Mar-07 30-Mar-06

Total Income 6891.92 5064.64 4329.21 3,731.85 2,403.15Profit After Tax (PAT)

513.45 313.04 258.30 193.58 136.97

Objects of the Issue:

The Object of the issue are to:1. Setting up of new manufacturing facility at Unit 4 at Badlapur, Maharashtra;

2. Expansion of existing manufacturing facilities at Unit 1, Unit 2 & Unit 3 at Badlapur, Maharashtra;

3. Meeting Working Capital requirements;

4. General corporate purposes; and

5. Issue expenses.

Issue Detail:

  »» Issue Open: Jan 24, 2011 - Jan 27, 2011

  »» Issue Type: 100% Book Built Issue IPO

  »» Issue Size: 8,100,000 Equity Shares of Rs. 10

  »» Issue Size: Rs. 76.95 - 79.38 Crore

  »» Face Value: Rs. 10 Per Equity Share

  »» Issue Price: Rs. 95 - Rs. 98 Per Equity Share

  »» Market Lot: 60 Shares

  »» Minimum Order Quantity: 60 Shares

  »» Listing At: BSE, NSE

Omkar Speciality Chemicals Ltd

CARE Limited has assigned an IPO Grade 3 to Omkar Speciality Chemicals Ltd IPO. This means as per CARE, company has 'Average Fundamentals'. CARE assigns IPO grading on a scale of 5 to 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals.

REGULATORY FRAMEWORK

The Book Building guidelines were first introduced by SEBI in 1995 (clarification XIII, dated 12.10.95) for optimum price discovery of corporate securities. The SEBI, from time to time modifies the guidelines in order to upgrading the existing mechanism. The SEBI in its press release dated 7th September, 1998 prescribed the fresh guidelines for book building mechanism after thorough modification and it was again modified in 2001(Circular No.2, dated 6.12.2001) and 2003(Circular No. 11, dated 14.08.2003).

According to the SEBI, a public issue through Book Building route should consist of two portions:

(a) the Book Building portion and (b) the fixed price portion. The fixed price portion is conducted like normal public issues (conventionally followed earlier) after the book built portion during which the issue price is fixed after the bid closing date. Basically, an issuer company proposing to issue capital through book building shall comply with the guidelines prescribed by SEBI. However, the main theme of SEBI guidelines regarding book building can be presented at a glance in the following manner:

(1) 75% Book Building process: Under this process 25% of the issue is to be sold at a fixed price and the balance 75% through the Book Building process.

(2) Offer to public through Book building process: The process specifies that an issuer company may make an issue of securities to the public through prospectus in the following manner:(i) 100% of the net offer to the public through book building process, or(ii) 75% of the net offer to the public through book building process and 25% of the net offer to the public at the price determined through book building process.

Application in delisting

Interestingly, SEBI has made it compulsory for promoters of companies desiring to delist to determine the exit price for delisting in accordance with the book building process. The final offer price is to be determined as the price at which the maximum number of shares has been offered. The acquirer shall have the option to accept the price. If the price is accepted, the acquirer shall be required to accept all offers up to and including the final price but may not have to accept higher priced offers. SEBI has given the following illustration:

If the offer is accepted, the acquirer has to accept offers up to and including the final price, that is, 240 shares at the final price of Rs. 130. 

REVERSE BOOK BUILDING

Securities and Exchange Board of India has issued the SEBI (Delisting of Equity Shares) Regulations 2009 for voluntary delisting of equity shares

from stock exchanges which provide the overall framework for voluntary delisting by a promoter or acquirer through a process referred to as Reverse Book Building. 

The promoter or acquirer shall appoint a Merchant Banker and also a trading member for placing bids on the online electronic system. The Merchant Banker and promoter shall make a public announcement and also dispatch a letter of offer to the public shareholders along with a bidding form. Shareholders may approach the trading member for placing offers on the on-line electronic system with the bidding form. The shareholders desirous of availing the exit opportunities are required to tender their shares to the trading members prior to placement of orders. Alternately, they may mark a pledge for the shares. 

The final offer price shall be determined as the price at which the maximum number of shares has been offered. The promoter shall have the choice to accept / not accept the price. If the price is accepted, the promoter shall be required to accept all valid offers upto and including the final price. However, if the quantity eligible for acquiring securities at the final price offered does not result in promoter holding crossing the limits specified in the Regulations, the offer shall be deemed to have failed and the company shall remain listed. 

At the end of the offer, the merchant banker to the book building exercise shall announce the final price and the acceptance (or not) of the price by the promoter. Any remaining public shareholders may tender shares to the promoter at the same final price upto a period of one year from the date of delisting.

Special provisions have been provided in case of voluntary delisting of small companies. Equity shares of such companies may be delisted without following the Reverse Book Building process and by following a separate procedure specified in the Regulations. 

Book building vs. Reverse book building

While book building is used to raise capital for the company's business operations, reverse book building is used for buyback of shares from the market. Reverse book building is also a price discovery method, in which the bids are taken from the current investors and the final price is decided on the last day of the offer. Normally the price fixed in reverse book building exceeds the market price.

Book building is the price discovery method in which the investors bid for the shares of the company during IPO/FPO. They are given a price range in which the investors have to bid for the shares.

Depending on the demand and supply of the shares, the issue price is fixed. Those who bid at the price higher than the issue price end up

getting refund and those who bid at the price below the issue price end up paying the remaining amount.

ACKNOWLEDGEMENT

We would like to thank Mrs. Jaya for giving us this opportunity to enhance our knowledge on book building and all the legal procedures involved in it. We are sure this opportunity will really help us.

INDEX

SR. NO. TOPIC PAGE NO.1. Introduction 12. Book Building in India 63. Process 74. Regulatory Framework 13

5. Reverse Book building 156. Case study 177. Acknowledgement 208. Made By 21

MADE BY:

MAHEK SHETH (55)

MONIL SONAIYA (56)

JIGAR TAILOR (57)

NIKITA TORKA (58)

MANOJ THADANI (59)

ABHINAV UPADHYAY (60)