Book building is a process commonly used in capital markets to determine the demand for securities being offered to the public. It involves the collection of investor bids or indications of interest, which are then used to determine the final price and allocation of securities. The key steps involved in conducting a book building exercise can be summarized as follows:
1. Appointing a bookrunner: The first step in conducting a book building exercise is to appoint a bookrunner, typically an investment bank or a syndicate of banks, who will manage the process. The bookrunner plays a crucial role in coordinating the exercise, interacting with potential investors, and ensuring the smooth functioning of the book building process.
2. Preparing an offer document: The issuer, in consultation with the bookrunner, prepares an offer document that provides detailed information about the securities being offered, including their terms, conditions, and risks. This document serves as a key source of information for potential investors and helps them make informed investment decisions.
3. Marketing and investor education: The bookrunner, along with the issuer, conducts a marketing campaign
to generate interest among potential investors. This may involve roadshows, presentations, and meetings with institutional investors, analysts, and other market participants. The aim is to educate investors about the offering and create awareness about its potential benefits.
4. Collecting investor bids: During the book building period, potential investors submit their bids or indications of interest to the bookrunner. These bids can be in the form of price range indications or specific bid prices. Investors may also indicate the quantity of securities they are interested in acquiring.
5. Building the order book: The bookrunner collects and compiles all the investor bids to create an order book. The order book contains information about the bid prices, quantities, and investor details. It provides a consolidated view of the demand for the securities being offered.
6. Price discovery: Based on the bids received, the bookrunner, in consultation with the issuer, determines the final price at which the securities will be offered. This is typically done by analyzing the demand and supply dynamics reflected in the order book. The aim is to set a price that maximizes the issuer's proceeds while ensuring sufficient demand for the securities.
7. Allocation of securities: Once the final price is determined, the bookrunner allocates the securities to investors based on their bids and the allocation criteria specified in the offer document. The allocation process aims to ensure a fair distribution of securities among investors while taking into account factors such as bid size, price, and investor type.
8. Securities issuance and listing: After the allocation process is completed, the securities are issued to the successful investors, and the issuer may proceed with the listing of the securities on a stock exchange
. This allows investors to trade the securities in the secondary market.
9. Post-book building activities: Following the completion of the book building exercise, the bookrunner may engage in post-book building activities such as investor feedback sessions, reporting to regulatory authorities, and managing any post-issuance obligations.
In conclusion, conducting a book building exercise involves several key steps, including appointing a bookrunner, preparing an offer document, marketing and investor education, collecting investor bids, building the order book, price discovery, allocation of securities, securities issuance and listing, and post-book building activities. These steps collectively enable issuers to gauge investor demand, determine an appropriate price, and allocate securities in an efficient and transparent manner.