If you are trying to understand how companies pick the right price during an IPO, you need to first know what book building is. Book building helps companies do this with real bidding interest.
Rather than announcing a single price upfront, the company collects bids inside a range to see how investors value the offer. Want more details on this? Read the blog thoroughly.
What is book building?
Book building is the method in IPO used when a company decides to sell its shares to the public for the first time, it has to figure out the right price. It is a simple bidding window where investors tell the company how many shares they want and how much they are ready to pay within a given range.
Suppose a company plans to issue 80 lakh shares and sets a price band of ₹320 to ₹345. Here, ₹320 acts as the minimum price and ₹345 is the upper limit. Investors can place bids anywhere inside this range based on what they feel the shares are worth. Retail investors may also choose the cut off option, which allows them to accept the final price decided after all bids are reviewed.
Why is book building important in IPOs?
The book building process is made for all the IPOs. Let’s check why is it important:
1. Accurate price discovery
In book building, investors place bids at different price levels inside a set range. These bids show where true interest lies. If most bids cluster at the higher side, the final price moves closer to that point. If the lower end draws attention, the price settles there.
2. Capital raising with better clarity
Since bids come in from various categories of investors, the company gets a fair idea of how much money it can raise at each price point. This helps the company settle at a price that captures wide interest without pushing investors away.
3. Valuable market feedback
During the bidding window, the company watches how investors react to the price band. If interest is very strong, it signals market comfort. If the response is slow, the company may review the allocation strategy or prepare for cautious listing behaviour.
4. Support
Market regulators encourage book building because it keeps the pricing method open. The rules make sure that all categories of investors get fair treatment and that the company communicates during the offer period.
What is accelerated book building?
Accelerated book building is a quick way for a company to raise money by selling shares to big investors within a very short window. Rather than taking days or weeks, the entire process can wrap up overnight or within one or two days.
It is mainly used when a company wants funds without delay, maybe for a sudden acquisition or to handle a pressing financial pressure.
In this method, the company reaches out to large institutions like mutual funds and pension funds. These investors already understand the market well, so they do not require long presentations or long meetings.
For example: A company wants to raise ₹1,200 crore to repay short term borrowings. It opens bidding with a price band of ₹410 to ₹425. Large institutions submit bids within a few hours. The demand covers the full amount and the final price is fixed at ₹423.
How does book building work?
To understand the faster version, it helps to first understand the simple version of book building.
1. The company appoints investment banks
These banks prepare documents, suggest a price range and talk to potential investors. Think of them as the main organisers of the offer.
2. Investors place bids within the price band
Each investor chooses how many shares they want and what price they are ready to pay within the range. These bids are recorded in a book.
3. The book shows demand clearly
If more investors bid at the higher side, it shows stronger interest. If the lower side attracts more orders, it signals caution.
4. The final price is picked after studying the entire book
The company and the bank fix a price that reflects the overall interest. This final price is called the cut-off price.
5. Shares are then distributed
Sometimes, large, long-term investors get priority. This helps the company build confidence in the early stage of the offer.
Why company go book the building process
When a company decides to enter the public market for the first time, the biggest challenge is simple. What should be the price of each share? If the company asks for too much, investors may pull back.
Book building helps solve this in a practical and clear way. Rather than fixing a price blindly, the company collects bids from investors within a price range.
This method has become the preferred choice in most major IPOs because it brings clarity, fairness and a strong sense of trust among investors.
What is book-building process in IPO
Here is how book building works:
1. Appointment of investment banks
The company hires banks that act as the main organisers. They prepare key documents, draft the price range and reach out to potential investors.
2. Investors place bids
Every investor mentions two things:
- How many shares do they want
- The price they are willing to pay inside the range
3. The order book shows interest clearly
Once the bid window closes, the book shows how many shares were requested at each price point. This gives a full picture of investor interest.
4. Final price is decided
The company and the banks study the entire book and pick a price that reflects overall demand. This final figure is called the cut-off price.
5. Shares are allotted
After the final price is set, shares are distributed. Large investors may receive priority in some cases, while retail investors get their portion based on guidelines.
Understanding the risks in IPO pricing
Pricing can still run into issues if the process is not managed well or if outside factors hit during the bidding window.
1. There is still a chance of underpricing or overpricing
Even though bids guide the final price, large investors may place strategic bids that push the price in a certain direction. This can lead to the company collecting less money than it could have. On the other side, aggressive bidding may push the price too high, causing drops when trading begins.
2. Sudden market swings can spoil demand
If negative news breaks during the bidding period, investors may pull back. This can reduce bids and lead to an unattractive final price. Timing plays a bigger role in IPOs than most people think.
3. Large investors may have more influence
Institutions usually have deeper research and stronger networks. Their bidding decisions often shape the entire book. Retail investors get a fair share, but they rarely have the same influence in setting the final price.
Types of book building
Book building comes in more versions than most people realise. Some are common. Some are used only in special cases.
1. Standard book building
This is the widely used method for large IPOs. Investors place bids inside a price band. The final price comes from the highest level that clears the required quantity.
For example: A company issues 2 crore shares with a price band of ₹550 to ₹585. Bids flow in from retail buyers, institutions and HNIs. Most bids fall near ₹580. After reviewing demand, the company fixes the final price at ₹582.
2. Accelerated book building
This version is very fast. It targets institutions and is usually completed overnight or in one or two days.
3. Partial book building
Here, the company invites only a selected group of investors instead of opening the book to everyone.
4. Fixed price method
The price is declared upfront. Investors do not bid. They simply buy at the quoted price.
5. Reverse book building
Used during share buybacks. Instead of selling shares, investors quote the price at which they are ready to return shares to the company.
Advantages of book-building process
Book building gives companies a view of how much interest the market truly has in their shares. Here are more advantages of it:
- The bidding range is public, and the process is monitored closely. After allotment, many markets also reveal how bids were placed.
- Since the company sees demand at different price points, it can make choices about how many shares to sell.
- Institutions, high net worth individuals, and retail buyers can all place bids. This creates a broader shareholder base and helps during the early trading period.
- Book building follows the rules laid out by market authorities. Companies have a clear path to follow, and investors gain comfort from the checks placed on the process.
Disadvantages of book building process
Book building brings strong advantages, but it also comes with challenges. Check them here:
- Multiple intermediaries take part, including underwriters, banks and legal teams. Their involvement increases total expenses compared to a simple fixed price offer.
- The bidding window, investor outreach and regulatory paperwork make the process slower.
- If sentiment turns negative during the bidding period, demand can fall sharply. This may force the issuer to settle at the lower end of the range.
- Institutions submit large bids that naturally carry more weight. Retail investors still get their share, but their bids rarely shape the final price.
Difference between fixed pricing and book building
| Point | Fixed Pricing | Book Building |
| How the price is set | The company announces a single price before the issue | Price is discovered through bids placed within a range |
| Transparency | Limited | Higher |
| Investor role | Investors subscribe at one unchanged price | Investors help shape the final price through their bids |
| Process | Shorter | More detailed |
| Pricing risk | Higher chance of mispricing | Lower pricing risk due to demand-based inputs |
| Allocation | Mostly uniform | Can prioritise large or early investors |
FAQs
Book building is what companies use during an IPO to find a share price. Investors place bids inside a given range. These bids help the company understand true demand. After studying the entire book of bids, the company finalizes a fair price for allottees.
In fixed price issues, the company declares one final price before the IPO opens, and every investor subscribes at that same price. In book building, investors choose their price within a range, and the final figure is decided only after checking demand.
Investors mention how many shares they want and the price they prefer inside the band. These bids reveal the market’s willingness to pay. Large institutions influence the top end of the book, and retail buyers help broaden participation.
The cut-off price is the point at which the company can sell the required number of shares while matching demand. Investors who select the cut-off option agree to accept this final figure. Those who bid below it do not receive shares. The cut-off price becomes the uniform price for allotment.
The issuer sets the price band along with the lead bankers managing the IPO. They study the company’s financials, market conditions and the interest of early investors before finalizing this range. The band is then shared with the public so everyone knows the minimum and maximum limit within which bids can be placed.
Companies must file detailed documents, announce the price band and share information before opening the offer. SEBI monitors the bidding period, requires clear communication with investors and mandates post-issue reports that show how bids were placed. These rules help keep the process orderly for all categories of investors.
In 75% book building, only three fourths of the issue is priced through bidding and the rest can follow another method. In 100% book building, every share in the IPO is priced through bids inside the band. The partial version combines book building with other pricing choices. It gives issuers more space to structure the offer.
