Question

Answer in brief.

What is Book Building Method?

Answer 1

Book Building Method is one of the pricing methods that a company can use for Public issues or offers.

1. Under this method, the issuer company determines the number of shares and the issue price at which its shares will be sold by the bidding process.
2. The company issues a Red Herring Prospectus which contains a price range or price band and asks the investors to bid on it.
3. Here, the minimum price of the bid is called 'Floor Price' or 'Ask Price, and the maximum price of the bid is called 'Cap Price or 'Bid Price'.
4. The final price at which shares are offered to the investors is called as 'Cut-Off price. The bids along with the application money are to be submitted to the Lead Merchant Bankers called 'Book Runners' who enter the bids in a book.
5. After bidding is over, the company fixes 'cut off-price based on the highest or best price at which all shares on offer can be sold.
6. The company issues a prospectus that contains the final price. Book building method is used for public issues i.e. IPO and FPO.