Book Building Process Explained as per SEBI
Introduction
This document explains the Book Building Process for IPOs in India as defined by SEBI (Securities and Exchange Board of India). Book building is the most commonly used method for price discovery in Mainboard IPOs.
Under this process, the issue price is discovered based on investor demand at different price levels, rather than being fixed in advance.
What Is the Book Building Process?
The book building process is a SEBI-regulated mechanism where investors bid for shares within a specified price band. Based on these bids, the final issue price (cut-off price) is determined.
It is mandatory for most Mainboard IPOs in India and optional for certain SME IPOs, subject to exchange approval.
Key Participants in Book Building
- Issuer Company – The company offering shares to the public
- Book Running Lead Managers (BRLMs) – Merchant bankers responsible for managing the issue and price discovery
- Stock Exchanges (BSE / NSE) – Provide the electronic bidding platform
- Registrar to the Issue – Finalizes allotment and investor records
- Investors (RII, NII, QIB) – Submit bids at chosen price levels
Price Band and Lot Size
Before the IPO opens, the issuer announces a price band, consisting of a lower price (floor price) and an upper price (cap price).
As per SEBI rules, the cap price cannot exceed 120% of the floor price.
Applications must be made in multiples of the specified lot size, which determines the minimum investment amount.
Bidding Process During IPO
During the IPO issue period, investors place bids by specifying:
- Number of lots
- Bid price within the price band (or cut-off option for retail)
- Investor category (Retail, NII, QIB)
Cut-Off Price Explained
The cut-off price is the final price at which shares are allotted. It is determined after analyzing demand across all price levels.
Retail investors may choose the cut-off option, indicating willingness to buy shares at the final discovered price.
Example of Book Building
Suppose an IPO has a price band of ₹90–₹100 and 1,00,000 shares on offer.
- ₹90: 20,000 shares bid
- ₹95: 40,000 shares bid
- ₹100: 80,000 shares bid
At ₹100, cumulative demand reaches 1,40,000 shares, exceeding supply. Hence, ₹100 becomes the cut-off price.
IPO Closure and Price Discovery
Once the IPO closes, bidding stops and the final demand book is analyzed by the lead managers.
Based on valid bids, the cut-off price is finalized and submitted to stock exchanges for approval.
Allotment as per SEBI Rules
Allotment under the book building process follows SEBI-prescribed category-wise rules:
- Retail Investors – Lottery-based allotment if oversubscribed
- NII – Proportionate allotment
- QIB – Proportionate allotment based on demand
Benefits of Book Building
- Transparent and market-driven price discovery
- Reflects real investor demand
- Reduces chances of mispricing compared to fixed price issues
Important Notice
This document is intended for educational purposes only. It does not constitute investment advice or a recommendation to apply for any IPO.