It is the process of determining the price at which an Initial Public Offering is offered. The book is filled with the range of prices that investors indicate they are willing to pay per share, and when the book gets closed on the closing of primary issue, the issue price is determined by an underwriter or merchant banker by analyzing these values. It is the solicitation of tentative interest from likely institutional and individual investors by the investment banking syndicate of a new security issue before the offering has been approved by the Securities and Exchange Commission.
The system of following a book building method for offering new issues through primary markets has become more popular over the conventional method of pre-determining the issue price by merchant bankers and companies, as the same enables more flexibility and transparency in the system of determining the issue price for a primary issue floated in the markets, by giving the potential investors a larger window to participate in helping the company/ merchant banker arrive at the final issue price, according to the demand and supply for instrument, at different price points.
The relatively mature capital markets across the globe have established this as a simple and more acceptable and popular method for floating of new issues, rather than arbitrarily determine the issue price at a price point, in advance to the IPO, by way of expected demand for the issue, and the premium it may be able to command. However, in some of the emerging markets where capital markets have not yet become mature enough, book building method for IPO’s is still at a nascent stage.
Book building method is a relatively new phenomenon of modern pricing mechanism for IPOs, which encourages companies to enlist with stock exchanges as it ensures fair pricing of initial public offerings (IPO). While in some of the developed