Getting The Prices Right

THE way book-building works is simple. An issuer who plans a new issue of Rs 100 crore and above first appoints a lead manager, to be called a book-runner, who in turn appoints syndicate members. Potential investors—mainly mutual funds, financial institutions and FIIs—will give indications of interest (IOI) for a certain number of shares at a price. They will then submit a price-range based on the growth prospects and comparables to the syndicate members in a standard format to ensure uniformity and accuracy.

Syndicate members then forward orders to the book-runner and are, in turn, pro-vided with summaries of demand for confirmation of order details. The members will also feed information back to investors throughout this process, concerning the competitiveness of their IOIs in order to encourage them to refine their price and size.

Once the book-runner has received enough orders to oversubscribe a couple of times, the issue is then priced at a level where high quality long-term investors are allocated approximately half their demand. Says Julian Summer, managing director, Merrill Lynch Equity Capital Origination, Hong Kong, who has wide experience in book-building options in the US,Europe and Asia: "The timing in this is crucial. In the US, within 20 days of a launch offer, the investors are delivered shares and the secondary market trade gets in swing."

Typically, a book-building process in the US takes about 20 days after the printing of the draft prospects or the 'red herring', for the scrip to be listed and traded. In Hong Kong, it takes 10 days. Under the new SEBI guidelines on book-building, the process will take 60 days after the publication of the red herring and the launch of the offering. Another two weeks would be required for the placement portion of the offering to be listed and traded and a month for the public subscription portion to be listed and traded. Says Hemendra Kothari, chairman of DSP Financial Consultants: "What we need to do is to shorten the amount of time between local pricing of an issue and listing/trading of the issue from 64 days under the new guidelines to approximately 3-7 days. Scripless trading creates the possibility that trading could begin on a 'when issued' basis on the stock exchanges."