Over the years, the process of Book Building in IPO pricing has gathered considerable attention. This article discusses the various aspects of this unique pricing mechanism.
A
country's economic growth at the world arena depends upon a number of factors,
the most important being the stock market. There exists a positive correlation
between the economic growth of a country and the status as well as performance
of its stock market. A country with strong financial fundamentals depicted through
well-developed stock market registers higher growth as compared to a country with
weak capital market. In the 1990s, when India adopted the policy of Liberalization,
Privatization and Globalization (LPG), the government was on the look out for
bringing the capital market at par with international practices. So, there was
a dire need to strengthen the stock market, which was possible through various
modifications not only in the structure, but also through new market mechanisms
and new instruments, ensuring that investors' interest was protected by complying
with disclosure and transparency in norms. Due to this, an important mechanism
named Book Building came into existence in the year 1995.
The
pricing of an Initial Public Offering (IPO) can be a vexing task for companies,
as they are required to fix the price in such a way that the issue becomes a success.
So, it would be better for the company, if the investor determines the optimum
price of the security that he is willing to pay which is also acceptable to the
company. It was with such an objective that a method known as Book Building was
developed for pricing of shares at the time of IPO. The book building system is
one of the major components of IPOs of Indian securities market. It was introduced
in India in the year 1995 by Sebi on the recommendations of the committee set
up under the chairmanship of YH Malegam.1 It is an innovative method
of offering securities to the public with regard to fixed pricing mechanism on
the basis of feedback received from prospective investors at a price the demand
for such securities. |
