Price Discovery Through Book Building Process

There are essentially two types of IPO in India where investors can participate in purchasing the company’s shares. These are Fixed price IPOs and Book Building IPOs where the prices of securities are determined.

In the book-building IPO, there is a price band within which investors can bid for the shares. These bids are at a price that is above or equal to the floor price. The bids are then collected at the end and based on the weighted average and the demand for shares, the price of the shares is determined. This process is called the price discovery process. The final price arrived through the price discovery process is also known as the cut-off price.

Important points on price discovery through book building proecss

SEBI guidelines state that a company can issue its securities for public subscription through a prospectus in the following manner:
a. 100% of the net public offer to be issued through the book building process
b. 75% of the net public offer to be issued through the book building process and
c. the balance 25% to be issued at the price that is determined through the book building process.