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Transcript of Book Building New2
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Zeeshan Saeed
Ayesha Rishi
Sidra Waheed
Bushra
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Book building refers to the process of generating,capturing and recording investor demand for sharesduring an IPO, in order to support efficient Price
Discovery
The issuer appoints a major investment bank to act as amajor securities underwriter or book runner
What Is Book Building?
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IPO before BookBuilding
Buying of shares on fixed price.
IPO after BookBuilding
Share prices between a specified price band
IPO and BookBuilding
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Example:
Floor Price = Rs 20
The spread between the floor and the capof the price band is not be more than 20%
20% of Rs 20 = 4
Cap Price = Rs 20 + Rs 4
= Rs 24
Price Range = 20 24
Price band
It refers to the band within which the investors can bid. Thespread between the floor and the cap of the price band is notbe more than 20%
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Difference Between Fixed Price Process andBook Building Process
Features Fixed Price process Book Building process
PricingPrice at which the securities are
offered/allotted is known in advance to theinvestor.
Price at which securities will beoffered/allotted is not known in advance to
the investor. Only an indicative price range is
known.
DemandDemand for the securities offered is known
only after the closure of the issueDemand for the securities offered can be
known everyday as the book is built.
PaymentPayment if made at the time of subscription
wherein refund is given after allocation.Payment only after allocation.
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BOOK BUILDING BID ENTRY
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This process will help to discover the demand and theprice of the shares. also, the costs of public issue aremuch reduced and the time taken for completion of
the entire process is much less than the in the normalpublic issue.
Why Book Building?
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Example
Bid Quantity Bid Price (Rs) Cumulative Quantity Subscription
500 24 500 16.67%
1000 23 1500 50%
1500 22 3000 100%
2000 21 5000 166.67%
2500 20 7500 250%
A company ABC wants to sell 3000 shares through Book Building Process at aprice band of Rs 20 24
Company received bids from 5 bidders in the following manner:
Rs. 22 then becomes your cut off price, and all bids above this price levelare considered legal bids
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The Retail Individual Investor (RII)
Non-Institutional Investor (NII)
Qualified Institutional Buyers (QIBs)
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The Retail Individual Investors (RIIs)
Also known as an "individual investor" or "small investor who buy and sell
securities for their personal account
RII is an investor who applies for stocks for a value of not more than Rs 100,000.
Non-Institutional Bidders (NIBs)
Individual investors, companies, trusts etc who bid for more then Rs 1 lakhs areknown as Non-institutional bidders.
Qualified Institutional Bidders (QIB's)
Financial Institutions, Banks, FII's and Mutual Funds who are registered with SECP arecalled QIB's. They usually apply in very high quantities.
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Division of shares in 100% Book Building
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Book Building Process
A Book-runner is nominated by IPO issuing company
Company announces the total number of shares to be
issued and the price band in which the investors can bid
Investors are then allowed to bid for these issued shares
for a specific period of time only
Investors place their bids (i.e. Price and quantity of shares) through brokers
Brokers stores in electronic book
Stored bids are evaluated by book-Runner
The book-runners and company decides the final price at which the shares
shall be issued.
IPOs are allotted to eligible investors.
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Benefits of Book Building
It provides a mechanism of price discovery and demand for shares in themarket
Reduces the risk of under pricing
Lower issue cost compared to traditional method
Issuing company also has the option to select the quantity of investors
More flexibility and greater control for issuing company
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LimitationsofBookBuildingSystem
In the case of the potential investors , the companies can adjust
the attributes of the offer according to the preferences of the
potential investors.
The issuer company should be fundamentally strong and well
known to the investors.
The book-building system works very efficiently in matured market
conditions.
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In such circumstances, the investors are aware of the
various parameters affecting the market price of the
securities.
There is a possibility of price rigging on listing as
promoters may try to bail out syndicate members.
Contd
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KARACHI, Oct 31 Pakistan Stock market`s first ever offerfor sale of shares via Book Building process wassuccessfully concluded on Thursday nov, 2009 by thebook runner, AKD Securities Limited, a statement by thecompany said.It stated that the book building for issuer Ghani GasesLimited stipulated confirmed bids for 8.6 million sharesagainst an offer of 6.0 million shares with the floor priceof the issue at Rs13.50 per share. The strike pricedetermined through the process of Dutch Auction Methodwas calculated at Rs14.00 per share. The issue was
oversubscribed by over 43pc.
First book building transaction concludes
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SECP AND BOOK BUILDING PROCESS
introduction of one uniform criterion for loan-based projects and
equity-based projects.
removal of restriction on the sponsors of companies to retain at least
25% of the capital for all times now it is just for three financial years .
removal of the requirement of project appraisal from a financial
institution.
exemption from certain requirements for charging premium in case
the issue/offer of shares is made through book building process.
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CONCLUSION
However, the book building process expected to increase substantially the
number of IPOs which in turn will offer the investors with additionalinvestment opportunities and also enhance the size and depth of thesecurities market.
Book Building process aims at fair pricing of the issue which is supposed toemerge out of offers made by various investors. One question may arisewhether book building is the right mechanism for fair pricing discovery inIPOs?
The answer may be in the negative because a floor price is fixed for the BookBuilding below which no bid can be accepted. Since investors participatethrough Book Building process in making fair pricing of IPOs where there is noceiling price, there should not be any floor price.
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THANK YOU!