Since its inception, the book-building process has emerged as the most efficient and practical way of price discovery, but evidences from IPOs in 2004 and 2005 present a different picture, which this article investigates.

The Indian capital market has come a long way after the deregulation of the economy in 1992. Both the primary and secondary markets have gone through reforms pertaining to structural and policy changes. Out of these reforms the dismantling of the Controller of Capital Issues (CCI) and the introduction of the free pricing mechanism was most commendable. The new pricing mechanism—the book-building method— was introduced by Sebi after the recommendation of the YH Malegam Committee in 1995. The book-building process allowed corporates to raise money at a fairly appropriate price against the historical pricing mechanism which was not permitted to do so. Although the book-building process emerged as the most practical and efficient way for the price discovery mechanism, mispricing of issues still exists in the market due to various reasons. The following paragraphs attempt to
analyze the IPO issues and their pricing mechanism in India.

Prior to 1995, the Indian capital market practiced fixed pricing methods and any company with three years of profit record was free to float the premium on face value at the time of issue. New companies were allowed to float the premium if their promoter had the same track record, but their promoters were bound to hold 50% of the post-issue capital. A company which has no promoter record was allowed to go for Initial Public Offering (IPO) at par value only. The mechanism of price fixing was in the hands of merchant bankers of the respective issue after taking consent of the company and carrying it out with due diligence. Several malpractices in pricing had been witnessed between 1990 and 1995, hence in order to protect the interest of small investors, Sebi finally decided to introduce the book-building process. In 1996, ICICI was the first company which used the book-building method for its Rs. 1000 cr bond issue.

Portfolio Organizer Magazine, IPO Pricing, Book-building Process, Indian Capital Market, Secondary Markets, Initial Public Offering, IPO, Institutional Investors, Primary Markets, Corporate Sectors, Regulatory Authorities, National Stock Exchange, NSE.