Book Building vs Reverse Book Building Process: Definition, Steps, Process and Mechanism - IPO Reviews

Sunday, May 20, 2018

Book Building vs Reverse Book Building Process: Definition, Steps, Process and Mechanism

If you are into the stock market or aware of how the stock market and IPO work, you might have heard of Book Building and Reverse Book Building issues.  While Book Building is the way of raising the capital by the company for its business operations, the Reverse Book Building issue is the way by which a company buy back shares from the market during the delisting of the company. 

Book Building Issue: Definition, Process and Mechanism:

An unlisted or a private company has various ways to raise funds. One of the ways os through the IPO (Initial Public Offer) route. While a listed company can raise funds via a Further Public Offer (FPO) or Right issue.  IPOs and FPOs are issued at a fixed price or a price range, which is given to the investors to determine the price. This process or the mechanism by which the securities are issued by giving the price range is called as Book Building method. Simply, the Book Building is a price discovery mechanism during an IPO.

Under this book building process, the issuer set a price band and ask the investors to bid within this price range depending on the demand-supply of the units. Here, the lowest price in the range is called the Floor price and the highest in the range is called as the Cap price. Cut off price is the price at which the securities or share are allotted to the investors. 

Whereas in the fixed price process, the issue price is set and given to the investors. The investors will apply only at the pre-set price offered by the issuer. Here the demand is known only at the end. Unlike in the book building issue, the demand is known on a daily basis.
Book Building vs Reverse Book Building Process: Definition, Process and Mechanism

Reverse Book Building Issue: Definition, Process and Mechanism:

Reverse book building is the process in which a listed company that wanted to delist from the bourses sets a price that is paid to the shareholders to buy back its shares. In simple words, the reverse book building process is used by the company during its delisting from the market.

There are various steps in the reverse book building issue. The first and foremost step is appointing a merchant banker to look into the electronic process. Then the banker and the company issues an advertisement that details about the floor price for the buyback of the shares. The stock exchanges facilitate this mechanism through the fully automated and screen-based bidding system. The shareholders can approach this facility or their broker to submit their shares. The shareholder can submit their shares at a price that is called as the tender price to the company. The final buyback price will be announced once the offer is closed.

Book Building vs Reverse Book Building Process:

By this time you might get aware of the whole process of book building and reverse book building process. In simpler terms, a book building process is done when an unlisted company decides to go public through an IPO. Book building process is a price discovery mechanism. Whereas the reverse book building process is done when a listed company decides to delist from the market. The company then sets a price called floor price and the shareholders then tender their shares to the company.

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