| Book Building Method -
September 10th, 2005
Book-building is a mechanism for efficient price discovery. In a book-building process, the issuer, instead of offering a fixed coupon to investors, offers a book-building coupon range. There is a fixed time period during which investors are required to submit their bids at the desired coupon rate within the range specified by the issuer. By the end of the book-building period, the issuer is able to build up a book of bids received from investors at various coupon levels. The issuer then decides the cut-off level based on the bids received by him, acording to his requirement of funds. Effectively, the lowest coupon at which the issuer is able to get the desired quantum of funds is the rate at which the book cuts off.
In the Indian context, book-building is widely used by good quality corporate issuers for achieving optimal pricing. Book-building in the Indian market is carried out on a Dutch auction basis, i.e. all investors are allocated securities at the cut-off rate irrespective of the levels at which they originally placed their bids. However, in case the book is oversubscribed, priority in allotment is given to investors who bid at lower levels. Unlike a typical book-building process, in the Indian context, the book is also widely circulated among investors which helps the issuer by generating competition among investors leading to aggressive bidding. Book-building thus helps highly rated corporate issuers in achieving optimal pricing by generating a high level of investor interest | 
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