Book building is a process used in Asia, primarily India, to determine the pricing of an initial public offering (IPO). It involves a series of activities that help set the price of securities, such as stocks and bonds issued by companies. This process has been widely used in the Indian security market since 1992. Book building helps maximise the value of an IPO to both issuers and investors, making it popular with issuers looking to raise money through stock offerings.

This article will discuss what book building is, how it works in Asian IPOs, and its advantages and disadvantages.

What is book building?

Book building is a way for companies or IPOs to set their financial goals before issuing their stocks. It includes a series of activities that can determine the price of securities such as shares or bonds by enabling investors to express interest in them. Moreover, it helps issuers understand what the market thinks about the offering before they set its pricing.

Generally, the book building process consists of four stages: pre-issue activities, book-building period, post-issue activities and allocation/settlement. As part of this process, the information given in the prospectus needs to be submitted to stock exchanges and regulators within specified time frames. The companies also need to provide pricing information within a specific time frame. During the book building period, interested parties submit bids for the number of securities they want at various prices. After this period, the issuer and its underwriters analyse the bids to determine an optimal price.

How does it work in Asian IPOs?

Book building plays a crucial role in Asian IPO subscriptions, particularly in India, where it has been used since 1992. In most cases, book building is done with cooperation from banks or financial institutions involved as intermediaries between issuers and investors. Initially, the company launches a prospectus which contains all the information about the offering that potential investors need to know. This includes details such as available shares and their current market prices. Investors can then submit their bids for various numbers of securities at different prices over a specified period. At this point, both institutional and retail investors can participate in the book-building process.

Once the book building period ends, the issuer and its advisors analyse the bids collected during this phase to determine the optimal price for each security. This is done by considering factors such as market conditions and demand levels. After that, allocations are made based on their respective bids and prices. Finally, settlement takes place once all of the transactions have been concluded.

Advantages and disadvantages

Book building offers several advantages over traditional IPO pricing methods. It gives companies greater control over pricing than traditional methods like Dutch auctions or fixed pricing. Furthermore, it allows investors to express their opinion about an offering before it goes public, allowing them to be better informed and, thus, more likely to make the right investment decisions.

However, book building also has some drawbacks. One of those is that it requires more preparation for IPOs, as a lot of information about the offering needs to be gathered. Additionally, there are risks involved when investors bid for securities at prices above their actual market value. They can lose money if the security does not perform well after going public. Book building also can create conflicts between issuers, banks and investors as different parties may have different interests in the process. Finally, book building involves several back-and-forth activities between issuers and investors, which can be time-consuming.

All things considered

Book building is an essential tool used in Asian IPOs as it allows companies to maximise the value of their offerings while allowing investors to express their opinion before they invest. Although this process involves many steps, it can benefit both parties if done correctly. To ensure a successful book building process, companies and their advisors should take the time to properly prepare before launching an IPO and thoroughly analyse all bids when determining its pricing.