Paper for discussion on Book building process in India

'Initial Public Offering - IPO'

Definition:
IPO is the first sale of stock by a private company to the public. IPOs are often issued by
smaller, younger companies seeking the capital to expand, but can also be done by large
privately owned companies looking to become publicly traded.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine
what type of security to issue (common or preferred), the best offering price and the time to
bring it to market.
Also referred to as a Public offering"

Book building:
Introduction;
When companies are on the look out to raise money for their business operations, they use
various means for the same.
Two of the most popular means to raise money are Initial Public Offer (IPO) and Follow on
Public Offer (FPO).
During the IPO or 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 as book building method.

Concept:
Book Building is a process by which corporate determine the demand and the price of a
proposed issue of securities through public bidding. The objective is to determine the
quantum of the issue on the basis of the price book built. Once the price and the quantum of
issue has been determined by the issuer, the issue may either be offered under the private
placement of the public offer category, or both, as per the requirement of the SEBI
regulations.

Definition:
Book Building is the process of determining the price at which an Initial Public Offering will
be offered. SEBI guidelines, 1995 defined book-building as a process undertaken by which a
demand for the securities proposed to be issued by a body of corporate is elicited and built up
and the price for such securities is assessed for the determination of the quantum of such
securities to be issued by means of a notice, circular, advertisement, document or information
memoranda or offer document. In general, the word Book building is a method of

marketing the shares of a company whereby the quantum and the price of the securities to be
issued will be decided on the basis of the bids received from the prospective shareholders by
the lead merchant bankers.
According to this method, share prices are determined on the basis of real demand for the
shares at various price levels in the market. Book building is a common practice in developed
countries and has recently been making inroads into emerging markets as well. When
companies are on the lookout to raise money for their business operations, they use various
means for the same. Two of the most popular means to raise money are Initial Public Offer
(IPO) and Follow on Public Offer (FPO).During the IPO or 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
as book building method.
Example
Book building is actually a price discovery method. In this method, the company doesn't fix
up a particular price for the shares, but instead gives a price range, e.g. Rs 80- 100. When
bidding for the shares, investors have to decide at which price they would like to bid for the
shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this
range. Based on the demand and supply of the shares, the final price is fixed. The lowest
price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price.

TYPES OF INVESTORS
There are three kinds of investors in a book-building issue.

The retail individual investor (RII),

The non-institutional investor (NII)

The Qualified Institutional Buyers (QIBs)

BOOK BUILDING- A PRICE DISCOVERY METHOD.

Book building is actually a price discovery method. In this method, the company doesn't fix
up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100.
When bidding for the shares, investors have to decide at which price they would like to bid
for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within
this range.

Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs
80) is known as the floor price and the highest price (Rs 100) is known as cap price.
The price at which the shares are allotted is known as cut off price.
The entire process begins with the selection of the lead manager, an investment banker whose
job is to bring the issue to the public.
Both the lead manager and the issuing company fix the price range and the issue size. Next
syndicate members are hired to obtain bids from the investors. Normally the issue is kept
open for 5 days.
Once the offer period is over, the lead manager and issuing company fix the price at which
the shares are sold to the investors. If the issue price is less than the cap price, the investors
who bid at the cap price will get a refund and those who bid at the floor price will end up
paying the additional money.
For e.g. if the cut off in the above example is fixed at Rs 90, those who bid at Rs 80, will
have to pay Rs 10 per share and those who bid at Rs 100, will end up getting the refund of Rs
10 per share. Once each investor pays the actual issue price, the shares are allotted.
TYPES OF PUBLIC ISSUES:
FIXED PRICE ISSUE: - When the issuer at the outset decides the issue price and mentions it
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
received from the prospective investors at various price levels, it is called as book built issue

BOOK BUILDING PROCESS IN INDIA

Book Building is fundamentally a procedure utilized in IPOs for effective price discovery. Its
a method where, during the time period for which the initial public offer is open, bids are
gathered from traders at different prices, which are higher or equal to the ground price. The
IPO offer price is decided following the bid ending date.

GUIDELINES BY SEBI
On the recommendations of Malegam committee, The concept of Book Building assumed
significance in India as SEBI approved, with effect from November 1, 1995, the use of the
process in pricing new issues.
SEBI issued the guidelines under which the option of 100%book-building was available to
only those issuer companies which are to make an issue of capital of and above Rs. 100crore.

 These guidelines were modified in 1998-99.The ceiling of issue size was reduced to Rs.
25crore.
SEBI modified book-building norms for public issues in 1999 and allowed the issuer to
choose either the existing or the modified mode of book building.

Modified Guidelines: Compulsory display of demand at the terminals was made optional.
The reservation of 15% of the issue size for individual investors could be clubbed with fixed
price offer
. The issuer was allowed to disclose either the issue size or the number of securities being
offered
. The allotment of the book built portion was required to be made in Demat mode only.

CHARACTERISTICS:

Tendering Process

Book building involves inviting subscriptions to a public offer of securities, essentially

through a tendering process. Eligible investors are required to place their bids for the number
of shares to be issued and the price at which they are willing to invest, with the lead manager
running the book. At the end of the cut off period, the lead manager determines the response
to the issue in terms of the quantum of shares and the highest price at which demand is
sufficient to match the size of the issue.

Floor Price:

Floor price is the minimum price set by the lead manager in consultation with the issuer. This
is the price at which the issue is open for subscription. Investors are free to place a bid at any
price higher than the floor price.

Price Band:

The range of price (the highest and the lowest price) at which offer for the subscription of
securities is made is known as price band. Investors are free to bid any price within in the
price band.

Bid:

The investor can place a bid with the authorized lead manager merchant banker. In the case of
equity shares, usually several brokers in the stock exchange are also authorized by the lead
manager. The investor fills up a bid-cum-application form, which gives a choice to bid for up
to three optional prices. The price and demand options submitted by the bidder are treated as
optional demands and are not cumulated.

Allotment:

The lead manager, in consultation with the issuer, decides the price at which the issue will be
subscribed and proceeds to allot shares to investors who have bid at or above the fixed price.
All investors are allotted shares at the same fixed price. For any allottee, therefore the price
would be equal to or less than the price bid.

Participants:

Generally, all investors, including individuals, eligible to invest in a particular issue of

securities can participate in the book building process. However, if the issue is restricted to
qualified institutional, as in the case of government securities, then, only those eligible can
participate.

THE PROCESS:
The procedures relating to the book building process depend on the level at which it is to be
taken up by a corporate entity. According to the SEBI, there are two options available to a
company either 75 percent or 100 percent book building process. Each of these methods is
discussed briefly below:

75 percent Book Building:

The 75 percent book building option of securities is offered on a firm basis where a minimum
of 25 percent of the securities is offered to the public.

The following steps are involved in this process:

1) Eligibility: All corporate eligible for public shares are also eligible for raising
capital through the book building process.
2) Earmarking securities: Where a decision is taken by a corporate to issue shares
through the book building process, the securities to be used should be separately
earmarked as the placement portion category in the prospectus. The balance securities
must be stated as net offer to the public category.
3) Draft prospectus: A draft prospectus containing all the information except price of
the issue must be filed with the SEBI. Although no precise mention is made, a price
band indicating the price range within which securities are being offered for
subscription should be indicated. The prospectus is to be filed with the ROC within
two days of the issue price being finalized.
4) Appointment of book runner: The issuing company appoints a merchant banker as
the book runner, which mentioned in the prospectus. The book runner circulates a
copy of the draft prospectus among the institutional buyers who are eligible for firm
allotment and to the intermediaries who are eligible to act as underwriters, inviting
them to subscribe to the issue of securities. The book runner maintains a record of the
names and number of securities ordered by intermediary buyers and the price at which

they are willing to subscribe the issue under the placement portion. The book runner
collects information about the subscriptions received from underwriters and other
intermediaries. After a stipulated time period, the book runner aggregates the
subscription so received. The underwriters are required to make a payment of the total
amount for the subscription of issues.

BOOK BUILDING VS FIXED PRICE :

The main difference between the book building method and the fixed price method is that in
the former, the issue price is not decided initially.
The investors have to bid for the shares within the price range given and based on the demand
and supply of the shares, the issue price is fixed. On the other hand, in the fixed price method,
the price is decided right at the start.
Investors cannot choose the price, but must buy the shares at the price decided by the
company. In the book building method, the demand is known every day during the offer
period, but in fixed method, the demand is known only once the issue closes.

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.

SNOWMAN LOGISTICS LIMITED

Snowman Logistics Ltd (Snowman), founded in 1993, is a leading integrated player in a
predominantly unorganised cold chain industry in India. The largest shareholder in the
company is Gateway Distriparks Ltd (GDL), which owns 48.33% stake in the company. The
other key shareholders in the company are Mitsubishi Logistics Corporation (2.93%),
Mitsubishi Corporation (12.63%), International Finance Corporation or IFC (12.46%) and
Norwest Venture Partners VII-A Mauritius (13.84%).

Snowman was incorporated by Amalgam Foods Ltd in 1993 as Snowman Frozen Foods Ltd.
In 1997, erstwhile Brook Bond India, (now part of Hindustan Unilever Ltd) acquired 23%
stake in the company. In 2001, Mitsubishi Corporation and Mitsubishi Logistic Corporation
jointly bought a majority stake in Snowman. Until then, the company was incurring losses. In
2006, GDL became the largest shareholder in the company by acquiring 33.34% stake and
revamped Snowmans management structure. In 2010, IFC acquired 20% stake. In 2011, to
reflect the change in positioning of the company, the name of the company was changed to
Snowman Logistics Ltd. In 2013, private equity firm NVP bought 14.28% stake in Snowman.
Snowman is engaged in cold chain warehousing and transport and value-added services for
perishable goods. In its transport business, the company offers services through primary and
secondary transportation. Primary transportation is an intercity service while secondary
transportation is an intra-city service. The company provides services to various industries
such as seafood, poultry, fruits and vegetables, dairy, ice-cream, food processing,
pharmaceuticals and some other niche segments.
IPO Grading