'Book Building' Well Practiced Internationally, New to Nepal

Jun 09, 2019 Merolagani

In the ceremony held marking the 27th year of Securities Board of Nepal (SEBON), Finance Minister Dr Yubraj Khatiwada announced of implementing 'Book Building' method in initial public offering (IPO) process from the beginning of the next FY.

Although the term 'Book Building' is not new for the international market and in practice for many years in the neighboring countries including China, India, Pakistan, Bangladesh, it is a completely new concept for Nepal.

Book building is the process in which an underwriter attempts to determine the price at which an initial public offering (IPO) will be offered. An underwriter, normally an investment bank, builds a book by inviting institutional investors (fund managers et al.) to submit bids for the number of shares and the price(s) they would be willing to pay for them.

Internationally, book building has surpassed the 'fixed pricing' method, where the price is set prior to investor participation, to become the de facto mechanism by which companies price their IPOs.

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. It is highly recommended by all the major stock exchanges as the most efficient way to price securities.

The book building process comprises these steps:

  • The issuing company hires an investment bank to act as underwriter who is tasked with determining the price range the security can be sold for and drafting a prospectus to send out to the institutional investing community.
  • Invite investors, normally large scale buyers and fund managers, to submit bids on the number of shares that they are interested in buying and the prices that they would be willing to pay.
  • The book is 'built' by listing and evaluating the aggregated demand for the issue from the submitted bids. The underwriter analyzes the information then uses a weighted average to arrive at the final price for the security, which is termed the 'cut off' price.
  • The underwriter has to, for the sake of transparency, publicize the details of all the bids that were submitted.
  • Allocate the shares to the accepted bidders.

Even if the information collected during the book building suggests a particular price point is best, that does not guarantee a large number of actual purchases once the IPO is open to buyers. Further, it is not a requirement that the IPO be offered at that price suggested during the analysis.

(Reference: Investopedia)

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