International Journal of Business

Management & Research (IJBMR)

ISSN (P): 2249-6920; ISSN (E): 2249-8036
Vol. 5, Issue 3, Jun 2015, 53-60
TJPRC Pvt. Ltd.

AN EMPIRICAL STUDY INTO PRICE DETERMINATION OF PUBLIC

ISSUES IN INDIA THROUGH BOOK BUILDING PROCESS
SHRI NARAYAN PANDEY
Junior Research Fellow, Faculty of Commerce, Banaras Hindu University, Varanasi, Uttar Pradesh, India

ABSTRACT
After abolition of CCI (Controller of Capital Issues), SEBI (Securities Exchange Board of India) provided
mechanism in hand of issuers to freely price their issues with certain disclosures as justification of pricing; called Fixed
Price method. But under the method of fixed pricing, it was herculean task for lead managers to set the most appropriate
price and if the price is not fixed at the best, the result will be either under subscription or over subscription. To bypass this
dilemma, a crucial reform in Indian capital market, for price determination of public issues by the economic forces of
demand and supply, was introduced in 1995 and this process is known as Book Building Method of price determination of
public issues. The endeavor of the researcher is to access the popularity of Book Building process of public issues over
fixed price method and to evaluate the performance of such issues.

KEYWORDS: Book Building, Fixed Price Method, Price Determination and Public Issues.
JEL Classifications
G2, G3 and K2

INTRODUCTION
On the basis of recommendations of Malegam Committee, Book Building as mechanism of price determination
by the forces of demand and supply was introduced in India in 1995.The pricing practice of public issues in India can be
studied in three different stages. Prior to 1992, public issues were to be approved by CCI and pricing were to be based on
CCI formula that is companies were not given autonomy to price their issues. But after abolition of CCI and establishment
of SEBI as apex regulatory body of Indian capital market, lead managers and companies were free to mutually fix the price
for the floatation of public issues. But the problem with this method was that it was quite difficult for a lead manager to
decide optimum price of public issues. And, if the issue was under-priced it would result in oversubscription consequently
huge refunding costs. While in case of over-pricing, the issue may not be fully subscribed thus leading to reduction in
credit of the lead manager.3rd phase starts with the introduction of Book Building process in 1995 however, it was in 1998
that SEBI formulated the rules for issuing shares through Book-Building process.
Book Building is the process of price determination based on the economic forces of demand and supply. Price is
fixed on the basis of bids made by the investors. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
defines Book Building as process undertaken to elicit demand and to assess the price for determination of quantum or
value of specified securities or Indian Depository receipts, as the case may be, in accordance with these regulations. Book
Building is the method of marketing the shares of a company whereby the quantum and the price of securities to be issued
will be decided on the basis of bids received from the prospective shareholders by the merchant banker. To cut it short and
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Shri Narayan Pandey

simple it is the process of generating, capturing and recording investors demand for shares during an IPO (&FPO) in order
to support efficient price discovery.

LITERARY REVIEW
Degeorge, et al. (2007)
In their study finds that the book building has captured most of the market share globally but is the most costly
procedure available in terms of direct and indirect initial under-pricing.
Bora et al. (2012)
In their study, covering period from April 2001 to June 2011 which concludes that Book-Building method is
preferred to Fixed Price method for efficient pricing determination. But, Fixed Price method is relatively more promising
in long term as compared to the issues made through Book-Building process. The study also concludes that most of the
companies with smaller issue sizes opted for fixed price mechanism and companies with bigger issue sizes had opted for
book building mechanism and that Book Building has encountered less under-pricing when compared with Fixed Price
offer.
Kumar (2012)
Finds that book building is more popular than fixed price option and major IPOs follow book building method
over fixed price option .It is also observed from data that the IPOs which failed in market adopted the Book building
method, but no such evidence is found from literature review of different researcher which shows that there is any
relationship between failure of IPOs and pricing tool adopted. So it is also a topic of further research to find out the
relationship between failure of IPOs and the pricing tools used.
Khanna (2012)
States, As far as magnitude of under-pricing is concerned, the book-built and fixed price option gave different
results.We found significant difference in level of magnitude of Under-pricing in IPOs that priced through book built with
those that are priced through the fixed price option.
Rashid (2013)
Has presented general idea of Initial public offering (IPO) and mentioned the listing procedure in Bangladesh.
He has made an attempt to focus on Book Building method in the security market of Bangladesh and discussed about its
problems created by manipulators. He finds that Book building method is apparently a sophisticated and widely used
concept but unfortunately, this method is being misused with some motive. It needs adequate efforts by regulatory agencies
to customize it for implementation in Bangladesh context.
Jain (2012)
Found that those IPOs that were issued by book building method were also underpriced and was the result of
investors high willingness to pay, high demand of issue, high firm values and high fluctuations in the market returns.
They also found that high value firm is more underpriced in India.

Impact Factor (JCC): 5.3125

NAAS Rating: 3.07

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An Empirical Study into Price Determination of

Public Issues in India through Book Building Process

Bansal (2012)
In their study found that there were no significant difference in the level of proportion of under-pricing and
overpricing of IPOs that priced through book build with those that are priced through fixed price option. These results are
not in agreement with earlier researches.
Sharma (2013)
Puts forward the procedural aspects and finds that the whole process is complex and multi stages. Still being a
cheapest source of finance, every company wants to acquire this source in the capital structure. Findings of this paper
describes about the full-fledged IPO-process in India. An IPO can generally be completed within 15 to 20 weeks. The exact
time table will vary depending on market conditions, the scope and complexity of the deal and a range of other factors.
Chopra (2009)
Finds the evidence of under-pricing in NSE. She further concludes that under-pricing is more severe in the short
run periods, i.e., from the listing day to the six months after the listing. However the long run IPOs tends to move to their
intrinsic value or true value wiping out much of the under-pricing. Factors influencing IPOs pricing performance are
subscription level, issue size, listing lead time and age.
Research Objectives
Followings are the prime motivations behind the study:

To assess the preference given by the issuer as efficient pricing mechanism between the two methods, Book
Building and Fix Price.

To study the average issue sizes being offered under both methods.

To cogitate listing performance of public issues in both cases.

Research Hypotheses

Ho: Book Building Method is preferred to fixed price method as efficient mechanism for price discovery.

Ho: Issue size is greater issue in case of fixed price than book built issue.

Ho: The listing performance of public issues is better in case of book building method in comparison with fix
price method.

RESEARCH METHODOLOGY
The present research work is based on secondary data obtained from website of BSE and Chittorgarh.com and
other web sources. An attempt has been made to go for empirical study covering the period from January 01, 2011 to
December 31, 2014.Available literature has been extensively surveyed to form the sound basis of the research and arrive at
standard conclusion. Long term performance of public issues has not been considered under this study. Descriptive
statistical measures have been applied to arrive at standard conclusion. To communicate the results in more effective
manner tables and charts has been presented. The results can be trusted only to the extent of availability and reliability of
secondary data.

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Shri Narayan Pandey

Process and Regulatory Framework

This process is an interactive and exciting one. It is the process of price discovery, i.e. there is no predetermined price
for the shares. As an alternative, the firm issuing the shares declares a price band. When a firm is offering shares to the
public via book building process, it sets a price band that defines the minimum and maximum price limits at which
investors can make bids for acquiring the shares of the company. The floor price signals the minimum price at which the
investors may bid for the shares, cap is the maximum price at which investors can make bids. Bids are then offered for the
shares. Each investor states how many shares he wants and what he is willing to pay for those shares (depending on the
price band). The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.

First of all, a lead merchant banker is appointed to play the role of Book Runner who is known as Book
Running Lead Manager (BRLM).If more than one merchant banker are appointed, others shall be known as
co-book runner. The names of all the merchant bankers shall be disclosed in the draft red-herring prospectus.
The book-runners may appoint Syndicate Members.

BRLM compulsorily underwrite the issue and the syndicate members shall sub-write with the BRLM. The detail
of underwriting arrangement shall be disclosed in the prospectus before it is registered with registrar of
companies.

The issuer shall enter into an agreement with one or more of the stock exchanges which have on line trading
facility.

The BRLM/ syndicate members shall appoint stock brokers who are members of recognized stock exchange and
registered with SEBI for accepting bids/applications and placing orders with the issuers and in case of Application
Supported by Blocked Amount (ASBA), Self Certified Syndicate Banks (SCSBs) shall accept such applications.
These brokers and SCSBs are known as bidding/collection centers and are paid commission/fee by the issuer and
in turn are prohibited to levy any service fee on clients/investors in lieu of their services in this regard.

The issuer spells out the no. of securities that are to be issued and also the price band for orders.

The issuer and BRLM mutually mention the floor price in red-herring Prospectus* (where the issuer opts not to
make the disclosure of the price band or floor price in red-herring prospectus the floor price or price band shall be
disclosed at least two working days in case of IPOs and at least one working day in case of FPOs before the
opening of the bid). The minimum acceptable price is known as floor price. And if the issuer opts for price band,
the cap of the price band shall be less than or equal to 120% of the floor of the price band. The price band can be
revised during biding period in which case the maximum revision on either side shall not exceed 20 %. The issue
has to be kept open for a further period of three days subsequent to the revision provided that the total bidding
period shall not exceed thirteen days.

Investors make their order with an associate member through electronically linked transparent bidding facility
provided by recognized stock exchange(s).The process is called Bidding and is akin to an open auction.

A public issue shall be kept open for at least 3 working days but not more than 10 working days.

Bids can be altered by the bidder during the period for which bidding is open.

Impact Factor (JCC): 5.3125

NAAS Rating: 3.07

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An Empirical Study into Price Determination of

Public Issues in India through Book Building Process

The issuer shall, in consultation with lead book runner, determine the issue price based on the bids received.

on determination of price, the number of specified securities to be offered shall be determined ( i.e. issue size
divided by the price to be determined)

Once the cut-off price is determined all those bidders whose bids will be above the cut off price shall be entitled
for allotment of specified securities. Allotment, in simple words, is the mechanism wherein those who apply are
given shares.

If a book built issue is launched after fulfilling the requirement under general condition*, the allotment in the net
offer to the public category shall be as follows:

Not less than 35% to retail individual investors (RII).

Not less than 15% to non-institutional investors (NII)

Not more than 50% to qualified institutional buyer(QIB), 5% of which shall be allocated to Mutual Funds (MFs)

And, if such an issue has been made in special circumstances*, the allotment in net offer shall be as follows:

Not more than 10% to RII

Not more than 15 % to NII

Not less than 75% to QIB, 5% of which shall be reserved for MFs.

Up to 30% of the portion available for allocation to QIB shall be available for allocation to Anchor Investors of
which 1/3rd shall be reserved for domestic MFs. The issue for anchor investors shall open one day prior to the
general issue opening date. There is a lock-in-period of 30 days for anchor investors.

The allotment of securities to applicant other than RII & Anchor Investors shall be made on proportionate basis.
Allotment to each RII shall not be less than the minimum bid lot subject to the availability in RII category and the
remaining available shares, if any, shall be allotted on proportionate basis. Allocation to anchor investors shall be
on a discretionary basis subject to certain conditions.

RESULTS & DISCUSSIONS

The findings of the paper can be presented as below

Ho: Book Building Method is preferred to fixed price method as efficient mechanism for price discovery.

The null hypothesis, as stated above, is accepted because the table 1 shows that for the period of study, out of total
144 issue; 60 issues were through book building route where as 84 issues adopted fix price method. The table also
clarifies that after 2011, the issuers gave preference to fix price method compared to book building method

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Shri Narayan Pandey

Table 1: Pricing Methods Adopted

Year
2011
2012
2013
2014
Total

Fixed Price Method

1
12
33
38
84

Book Built
37
10
5
8
60

Total Issue
38
22
38
46
144

Figure 1
Ho: Issue size is greater issue in case of fixed price than book built issue.
The null hypothesis that the issue size is greater in case of fixed price issues than book built issues, is rejected
because table shows that for the period under study, average issue size in case of book built issues is 298 which is quite
higher compared to fixed price issue where average issue size is 8.23.
Table 2: Average Issue Size (In Crore Rupees)
Year
2011
2012
2013
2014
Total

Average Issue Size

Book Built
Fix Price
166.21
60 (extreme value)
524.17
7.39
324.23
10.57
178.34
6.73
1192.95/4=298
24.69/3=8.23

Figure 2
Ho: The listing performance of public issues is better in case of book building method in comparison with fix
price method.
Impact Factor (JCC): 5.3125

NAAS Rating: 3.07

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An Empirical Study into Price Determination of

Public Issues in India through Book Building Process

Table 3 depicts that the incidence of over-pricing is less under fix price method compared to book building
method, rejecting the null hypothesis For the period under study, total 25 issues were over priced in case of book built
issues and 3 in case of fix price method. The frequency of under pricing was 26 in case of book building and 22 in case of
fix price method. Thus it clearly shows that listing performance under fix price method is better than book built issues.
Table 3: Incidence of Over-Pricing & Under-Pricing
Year
2011
2012
2013
Total

Underpriced
Book Built Fix Price
18
1
6
12
2
9
26
22

Overpriced
Book Built Fix Price
18
0
4
0
3
3
25
3

CONCLUSIONS
It is stated in introductory part of this paper that the purpose of book building method is to provide for better
pricing mechanism of public issues but the results shows that performance of the issue priced using fixed price method are
better. And, this may be the reason that after 2011, the issuers has given preference to fix price method compared to book
building method. There exists enough evidence to conclude that only those issues which aimed at raising huge amount of
capital, adopted book building route.

REFERENCES
1.

Bora, B., Adhikary, A., & jha, A. (2012). Book Building Process. International Journal of Trade,Economics and
Finance .

2.

Chakraborty, A., Pagano, M. S., & Schwartz, R. A. (2005). Bookbuilding.

3.

Chopra, R. I. (2009). Price Performance of IPOs in Indian Stock Market.

4.

Divya, H. (2013). A Study on Performance of Indian IPOs During the Financial Year 2010-2011. International
Journal of Marketing and Financial Services & Management Research .

5.

Kumar, P. (2012). A Study on Popularity of Book Building over Fixed Price Option. International Journal in
Multidisciplinary and Academic Reseach .

6.

Murthy, K. V., & Singh, A. K. (n.d.). IPO Market: Underpricing or overpricing?

7.

Pandey, A. (2004). Initial Returns, Long Run Performance and Characteristics of Issuers: Differences in Indian
IPOs Following Fixed Price and Book Building Process.

8.

Rashid, A. (2013). IPO Procedure: An Analysis of the Book Building Method in bangladesh. International
Journal of social Sciences .

9.

Sharma, M. (n.d.). A Review of Indian IPO Process.

10. (n.d.). Retrieved from www.chittorgarh.com.

11. (n.d.). Retrieved from www.bseindia.com.

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