The issuer company is required to comply with the guidelines of SEBI for Public Offer under Demystifying the book building process. A draft prospectus containing all the information except the information regarding the price at which the securities are offered is to be filed with SEBI. Number of securities to be provided to the public may also not be mentioned in the draft prospectus. The total size of the issue should, however, be reflected in the draft prospectus.
The issuer company is also required to appoint eligible merchant banker(s) as book runner(s) and their names should be made in the draft prospectus. The lead Merchant Banking should act as the lead book runner and the other eligible merchant bankers may function as co-book runners. In case the issuer company appoints more than one book runner, the name of all such book runners who have submitted the due diligence certificate to the SEBI may be mentioned on the front cover page of the prospectus. A disclosure to the effect that ‘the investors may contact any of such book runners for any complaint pertaining to the issue’ should be made in the prospectus after the risk factors.
Lead book-runner is primarily responsible for building the book. The book runner(s) may also appoint intermediaries (SEBI registered) who are permitted to operate as ‘underwriters’, as syndicate members. The draft prospectus, containing all the disclosures as per SEBI guidelines, except that related to price and number of securities to be offered to the public, should be filed by the lead merchant banker with the SEBI.
If the issuer company has appointed more than one lead merchant banker or bookrunner the rights, obligations and responsibilities of each should be delineated. In the case of under-subscription in any issue, the shortfall needs to be made good by the book-runner(s) to the issue and this responsibility should be incorporated in the inter-se allocation of responsibility.
The lead merchant banker/ bookrunner is also responsible to make sure that the modifications in the draft proposal/ final observations made by SEBI are incorporated in the prospectus. The book runner and the issuing company should determine the issue price based on the bids received through syndicate members. Additional pre-issue obligations of the lead merchant banker relating to due diligence, payment of the requisite fee, and submission of documents to SEBI, etc. are also applicable to the issue of securities through the book building route.
The bid should remain open for a minimum five days. The investor is allowed to change or revise the bid innumerable number of times. The book runner, on receipt of the bids/ offers, keeps a record of the names and number of shares ordered and the price at which the institutional buyer or underwriter is willing to subscribe to securities under the placement portion. On determination of the issue price, the number of securities to be offered has to be determined. This can be achieved by dividing the issue size by the final issue price. The issue price for the placement portion and offer to the public shall be same.
In case of under-subscription, in the net offer to the public, the spillover to the extent of under-subscription may be permitted by the placement portion to the net offer to the public subject to the condition that preference be given to the individual investors. In case of under-subscription, in the placement category, spillover may be permitted from the net offer to the public in the placement portion.
An issue of securities to the public under book building process needs to be compulsorily underwritten by the syndicate members/ book runner(s) to the extent of the entire net offer to the public. However, this requirement is not applicable to 60 per cent of the net offer to the public mandatorily to be allotted to the QIBs in case of public issue /offer for sale by unlisted companies through book building if they do not conform to the stipulation regarding minimum pre-issue net worth of Rs.1 crore, track record of distributable profit and the proposed issue size exceeds five times its pre-issue net worth.
The underwriter is required to enter an underwriting contract with the book runner(s) specifying the number of securities proposed being subscribed at the predetermined price. Shares offered through the book building process provide an opportunity to the issuer company to realize the demand driven price.
P.S.: SEBI has since made certain amendments in the DIP guidelines for IPOs under book building process.
These amendments will enter into force for all the IPOs for which the draft offer document is filed after April 4, 2005. Major amendments are furnished below:
Definition of Retail Individual Investors (RII): RII will be defined as one who applies for securities for a value not exceeding Rs.1 lakh (as against Rs.50000 at present).
Allocation for Retail Individual Investors (RII): As such, allocation to RIIs, NIIs and Qualified Institutional Investors (QIB) has changed from 25:25:50 to 35:15:50. In case where the allocation for QIBs is 60% mandatory, RIIs will be allotted 30% and NIIs will be given 10%. However, listed companies are now permitted to disclose the price band/ floor price one day before the bid opening.
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