In developed countries, book building process on public issue is in practiced but in the context of Nepal it is new. SEBON has stated this book building system to be implemented from coming fiscal year.
Book building to be practiced soon in Nepal. What is book building?
The book building is the process where underwriters/investment banker determines price of securities at which initial public offering (IPO) to be offered. It the process of discovering price of stock by inviting bids from institutional investors, investment banker, etc for the number of share at the varying price they would like to pay. This method helps to control overvalued or undervalued of security in the primary market.
The process of price discovery involves generating and recording investor demand for shares before arriving at an issue price that will satisfy both the company offering the IPO and the market. – investopedia
Steps of book building process
- Company appoints investment banker/ underwriter for security issue. They determine the price range of the security consulting with management. Lower end of price is called floor price & higher end is called ceiling.
- Invites bids from eligible institutional investors/ investment banker, etc to submit bids for number of shares at the varying price range they would like pay.
- After collecting all bid or demand for shares. Underwriter build book or discover final price using weighted average of all bid which is called cut off price.
- Underwriter publicize details of bid for transparency
- Finally, shares are allotted for bidders. Those who have bid at lower price may have to deposit additional amount and those who have bid above cut off price will get refund.
Book building process may be full or partial. In full book building all the individual & institutions investors are invited for bids and final cut off price is determined. But in partial book building only eligible institutions investors are invited for bids and cut off price is discover. Than same cut off price of institutions investors are offer for public as fixed.
It is to see how security board of Nepal will brings book building implementation in the primary market. What sorts of guidelines will be in the practiced.
